Should you consider interest only mortgage payments?
Mortgage holders who were hit hard by COVID-19, have been given added support by three of the big four banks who will allow them to switch to interest only loans once the pause button on repayments is set back to play.
Interest only loans mean you pay only the interest on the loan and not the principal.
Commonwealth Bank (CBA), ANZ and Westpac will allow more home owners to switch to an interest-only loan for 12 months, or extend their existing interest-only payments, when payment deferments end in September.
Criteria will also be loosened, with the Commonwealth now not requiring a serviceability assessment for those who wish to apply for a one-year interest-only (IO) extension, or switch their loan from principal and interest repayments to interest only.
The CBA will be looking at the following eligibility:
- Mortgage holders are not in arrears;
- Mortgage holders are not in financial hardship;
- Mortgage holders have a minimum of 1 year remaining on the contracted loan term at the expiry of the proposed interest-only term.
It should be noted that CBA borrowers whose deferral will expire, will only be eligible if they are no longer in financial hardship and have contacted the bank to cancel their deferral.
“We recognise that as the coronavirus situation evolves and customers start returning to work, they may require alternative temporary assistance measures to help them get back on their feet sooner,” CBA Group Executive Angus Sullivan said.
Note the support is available for those with existing home loans.
The CBA has processed deferrals on 144,000 home loans with balances totalling $50 billion. It has also processed 71,000 business loans with balances totalling over $15 billion, and 25,000 personal loans.
Overall, nearly 780,000 bank loans have been deferred due to the pandemic.
Westpac mortgagees can also switch from principal and interest repayments to interest-only. As with CBA customers, they will also be eligible to extend their current interest-only home loan term for a further 12 months without a serviceability assessment.
Customers with an average $400,000 mortgage could save between $400 and $500 dollars.
ANZ customers must meet more stringent criteria than the other banks:
- Requests for any additional lending will not be accepted
- Customers cannot split their loans
- The customer must have an income to service the loan and be employed
- Financial hardship must be due to COVID-19
- Loans must be either P&I or IO expiring within next 3 months
- The ANZ loan being renewed must be at least 6 months’ old (for 6 months IO), and 12 months old (for 12 months IO).
- A credit check will be required
As for the fourth of the big four, National Australia Bank (NAB) is dealing with cases on an individual basis.
NAB has been supportive, providing more than 98,874 home loan deferrals totalling $39.08 billion as of the end of May.
It also hired an additional 500 employees to assist with customer support during this time. By mid-June, 10 to 15 per cent of NAB customers had opted to restart their usual principal and interest payment schedule.
“Some may want to go back to interest only, some may need a longer deferral,” he said. “Each one of those is an individual checker, based around the customer’s situation and ‘how can we help them get back on their feet again?” said NAB boss Ross McEwan.
What are the issues to switching to interest only?
There can be long-term issues if switching to interest only loans.
- Firstly, the length of the loan on your mortgage will increase.
- Secondly if the length of the loan increases, you will pay more interest over the life of the loan which could amount to tens of thousands of dollars.
- Thirdly, you will likely pay a higher interest rate once the interest only period ends (although in this climate of super low interest rates, this shouldn’t have a significant impact).
- Borrowers who have deferred home loan repayments, should be aware that interest and fees that go unpaid during this period could be added to the outstanding loan balance resulting in higher repayments later on.
These are all factors you should consider before moving your loan from interest and principal to interest only. You may be able to save money in the short term, however it will still need to be repaid in future.
You should also ensure the money you save is used for the things you need including – and most importantly – household essentials.
The banks are doing all they can to help their customers out of this extremely difficult situation. If you are still having financial difficulties, the best thing you can do is contact them to find out what options are available to you.
This update is not financial advice. This article is general news and information.
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