A major bank has announced it will make payments to offset the interest costs that will accrue for customers who have been granted a six-month deferral on their home loan repayments due to the COVID-19 pandemic.
CBA group executive of retail banking services, Angus Sullivan explained, “When a home loan repayment is deferred for six months, interest is calculated and added to the loan balance each month which can result in customers paying interest on interest each month.
“To support more Australians, we will make a one-time payment to all customers who are receiving a home loan deferral because of the coronavirus.
“This means for an average loan of $350,000, CBA will be refunding approximately $45 to offset the effect of interest on interest over the six-month period. Customer payments will vary based on their loan amount and interest rate.”
Each of the big four’s current policies
CBA – Following the end of the six-month pause, home loan repayments remain the same as before, with the loan term being extended. CBA will also make a one-time payment to offset the interest on interest being charged to customers over the deferral.
Westpac – Impacted customers are being offered a 3-month pause with the option for a further 3 months after review. Home loan repayments increase after the deferral, but the loan term remains the same.
NAB – Following the repayment holiday, home loan repayments increase, but the loan term remains the same.
ANZ – Customers can choose to keep the loan term the same or extend it by six months, with a review at three months, with both options likely resulting in mortgage repayments increasing after the pause.
What it means for consumers
According to financial comparison site RateCity.com.au, clearing the debt following a repayment pause will be an “uphill battle” for many Australians.
The group’s research showed that a mortgage holder could end up paying as much as $17,000 extra over the remainder of their loan if they don’t make additional repayments following the holiday, assuming a borrower was five years into a 30-year loan with a balance of $400,000.
While RateCity.com.au research director Sally Tindall congratulated the banks for providing an option for those who can’t meet their repayments, she highlighted the importance of customers understanding the long-term implications of taking the six-month break.
“A lot of people will have to resort to putting their mortgage on hold during this crisis. That’s the cold hard reality for many families,” said Tindall.
“If that’s you, try to come up with a plan to pay the money back as quickly as possible after the pause to get your mortgage back on track.
“Repayment pauses should only be used when other avenues have been exhausted. Talk to your bank about what other options you might have, including a rate reduction or reduced repayments for a limited time.”