Is deferring your home loan repayments a good idea?

In light of recently introduced widespread COVID-19 restrictions, a number of Australian lenders have expanded support options for their home loan customers. This includes allowing eligible borrowers to defer their home loan repayments.

Home loan deferral is one way that struggling borrowers can deal with their financial hardship. In this article we’ll explain what it is, when to consider it, the pros and cons, as well as your alternative options.

• Related: What you need to know about mortgage repayment holidays before you need to take one
• Related: How to prepare for an interest rate increase

What is home loan deferral?

Home loan deferral is a formal, specified period of time where a borrower does not need to make repayments on their mortgage. In order to do this, borrowers must apply and obtain permission from their lender. If you just stop making repayments without speaking to your lender, you could risk defaulting on your loan, damaging your credit score, and even losing your property.

Home loan deferral is usually uncommon, but has increased in 2020 and 2021 due to the COVID-19 pandemic impacting the incomes of many homeowners. Lenders understand this and many have made the path towards home loan deferral more accessible.

Something to note is that if you choose to defer your home loan, you will still have to repay your loan in full eventually. Additionally, interest still accrues during a deferral period.

When to consider deferring your home loan repayments

Home loan repayment deferral is not a decision to make lightly, but there are a few situations where it may be worth considering. These may include:

1. When you have lost your job
2. Your working hours have been reduced, for example due to COVID restrictions
3. Your expenses have increased significantly, for example due to a new baby or an emergency
4. Other factors leading to income loss or cash flow reduction

Naturally, not all of these situations will automatically mean that you can’t afford your repayments. Plenty of borrowers have savings, extra repayments they can redraw, assistance from family, or are able to rectify the situation quickly.

However, if you’re unable to meet your repayments for any reason, home loan deferment may be an option to consider. Later in the article, we’ll look at some other options struggling borrowers can look to instead of mortgage repayment deferral.

Do you get charged interest while deferring home loan repayments?

Yes, interest will still accumulate over the deferral period, adding to the total amount you owe on your mortgage. This is known as interest capitalisation and can impact on the way you repay the remainder of your loan in the future. You may have to increase your repayment amount at some point to account for the increased debt, or look to extend your loan repayment term.

Interest can add up over the life of the loan, so it’s smart to calculate how much your home loan amount will increase over your repayment pause.

What are the benefits of deferring home loan repayments?

1. Financial relief: When you’re unable to repay your mortgage, you can feel stressed and deflated. Mortgage deferral means that you get a brief period of reprieve from this feeling, and gives you time to reorganise your finances (e.g. find a job, pay off other debts or credit cards).
2. Saving your home: While the downsides to home loan deferral aren’t great, repaying a bit of extra interest down the line can absolutely be worth it to avoid losing your home.

What are the drawbacks of deferring home loan repayments?

1. Your home loan balance will increase: The amount owing on your mortgage goes up due to the interest continuing to accrue during the deferred period. Remember that your repayments aren’t being covered by the bank during this time, they are merely on pause.
2. Can create future difficulties: Since your home loan balance increases, you will likely have to be prepared to meet higher monthly repayments in the future or think about restructuring your loan.

What can I do instead of deferring my home loan repayments?

If you’re struggling to meet repayments, you may have more options than just deferral. Plus, as mentioned above, home loan deferral comes with a number of disadvantages. Here are some alternative options to deferring your loan repayments:

1. Make sure that you are paying the minimum monthly repayment amount
2. If you’re making weekly or fortnightly repayments, switch to monthly payments as you’ll end up paying slightly less with a lower repayment frequency
3. Try to negotiate down your interest rate, as well as any fees. Many lenders offer no fee or low fee home loans
4. Consider refinancing and switching lenders to one that can offer a lower interest rate or lower fees, for example
5. Redraw any extra repayments you have made on your mortgage. Note that some lenders will actually take funds from your redraw facility before allowing you to defer your repayments
6. Consider switching to interest only repayments
7. You may also be able to extend your interest only period
8. A financial advisor can provide qualified financial advice, but it will likely come at a cost

Not being able to meet your repayments is a situation that no homeowner wants to be in. Unfortunately, the pandemic has made this more common. If you’re dealing with mortgage stress, it’s a good idea to get in touch with your lender. The majority of banks and lenders have dedicated financial hardship support teams that you can reach out to for assistance and guidance on your next steps.

If your home loan isn’t working out for you, or you’d just like to know more about your options, Lendi’s Home Loan Specialists can help. Get in touch today for free expert advice.

What could your home loan repayments look like?

Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.