Finance experts have cautioned people who have deferred their mortgage repayments and who still can’t start repaying their loans about taking advantage of the four-month extension of this scheme.
The Australian Banking Association this week announced people who still can’t pay their mortgage will be given the additional reprieve before banks start getting tough. But those who are able to start repaying their loans will be expected to do so.
Mortgage holiday extensions will be a huge relief for homeowners already under pressure or facing the prospect of further loss of income, said Domain Home Loans and Lendi director David Hyman.
“It will buy them more time before they need to start making repayments,” he said.
Hyman noted banks would review applications on a case by case basis.
“If you simply signed up for your initial mortgage holiday a few months ago, it’s highly likely you will need to go through a more rigorous process to have it extended,” he said. “And that’s important – you don’t want to be taking a mortgage holiday unless you absolutely have to. Interest builds up quickly and takes a long time to pay off.”
Rather than defaulting to an extension of a mortgage holiday, homeowners should explore all their options. he said. “You may be able to restructure your loan and reduce repayments to an affordable amount and that will put you in a much better position over the longer term.”
Southshore Finance director Michael Coombes agreed an extension of loan repayment deferments was welcome, but borrowers should understand a request to defer repayments for a further three months would undergo much more scrutiny than the original request.
“The bank will need to assess the genuine nature of the request and be convinced the borrower has the ability to recommence payments in the short term,” he said.
Coombes said allowing borrowers to increase their debt level through capitalising interest, combined with reduced property values, could rapidly lead to homeowners losing their equity.
“It might be in some borrowers’ best interests to sell now and crystallise their equity rather than sit back and watch it diminish further over coming months,” he added.
“It’s fair to ask if it’s responsible for lenders to stand by and allow borrowers’ equity to diminish in these circumstances. I would encourage borrowers to seriously consider whether seeking a further extension is the right thing for them.”
Property market impact
Hyman noted the property market had held up well considering COVID-19’s economic impact, saying “much of this comes down to the fact there’s been limited stock on the market”.
But according to Coombes, the chance of a significant increase in forced property sales is still high.
“The banks are very conscious of their social responsibility, and the potential impact on the property market if there is a large number of forced sales,” he said. “So they will be inclined to work with borrowers to find a solution. This might result in a steady stream of forced sales rather than an avalanche.”
Only time will tell.