As the COVID-19 pandemic causes businesses across the country continue to feel a squeeze, and many Australians to confront the prospect of unemployment, it is undoubtedly welcomed news that the big four banks have committed to allowing customers to ‘pause’ mortgage repayments. This is just one of several measures announced by the banks to assist households weather the storm.
Partner, Kim Hinton and Senior Associate, Chris Cullen outline the differing terms of mortgage relief from bank to bank and highlight the importance of understanding what each of the big four has announced to date.
Australia New Zealand Bank (ANZ)
ANZ customers experiencing financial difficulty due to COVID-19 will be able to defer mortgage repayments for up to six months, with interest capitalised – meaning that during the deferral period, while no repayments are required unpaid interest will accrue and be added to the outstanding loan balance. Effectively, customers will owe more money under the loan at the end of the deferral period than at the start, and will pay interest on the interest which capitalised during the period. However, this represents the price paid for the benefit of the deferral.
To apply for a repayment deferral, customers must complete ANZ’s online application form, after which a representative from the bank will get in touch to discuss progressing the application.
National Australia Bank (NAB)
All home loan customers 'financially affected’ by COVID-19 will be eligible to pause their home loan repayments for up to six months. NABs relief will not apply to line of credit (NAB FlexiPlus and Portfolio Facility) and interest in advance products.
During a deferral period, interest on loans will continue to accrue in accordance with the terms of customers’ loan contract and will be capitalised.
To request a deferral arrangement, eligible customers must submit an application through NAB’s online application form.
Westpac
Westpac customers who have lost their job or suffered loss of income due to COVID-19 will be able to apply for a three month repayment deferral arrangement, with a further three month deferral available upon review. Interest will continue to accrue and capitalise during the deferral period.
To request a repayment deferral, customers must complete Westpac’s online application form.
Commonwealth Bank of Australia (CBA)
Customers who request financial assistance will be able to defer mortgage repayments for up to six months, with interest and fees capitalised. Loan terms will also be extended so that repayments do not increase as a result of the deferral period (but may otherwise increase, for example, due to accessing redraw or changing interest rates).
CBA has also announced it will make a one-off payment to customers to offset any interest charged on interest which accrues during the six month deferral period. Naturally, this payment will vary depending on loan balance and applicable interest rate.
Unlike the other big four banks, CBA’s announcement does not indicate that customer eligibility for repayment relief will be limited to those who have experienced financial difficulty as a direct result of COVID-19.
In order to apply for relief, customers can request a repayment deferral arrangement by completing CBA’s online application form.
Overall, the announcements from the banks (other than CBA) indicate that the eligibility of customers to pause mortgage repayments will depend on whether or not a customer’s financial circumstances have been directly impacted by COVID-19. If so, those who have fallen ill, lost their job or otherwise have had their income affected by COVID-19 will presumably be eligible. Westpac’s eligibility criteria is clearest in this respect, requiring customers to have “lost their job or suffered loss of income”.
However, it is not entirely clear at this point what approach the banks will take to the assessment of customers’ financial circumstances and whether (and to what extent) evidence of hardship due to COVID-19 is required.
What if my home loan is not from one of the big four banks?
It is likely that other, smaller banks in Australia will follow the lead of the big four (if they have not already) and offer relief in the form of mortgage repayment deferrals. According to RateCity, at least 31 other banks in Australia have now committed to providing relief in various forms in response to the COVID-19 pandemic.
Accordingly, borrowers should check their bank’s website for details regarding the relief measures available.
My bank hasn’t announced whether it will be providing mortgage relief, so what other options are there?
For banks who have not yet announced mortgage relief measures, or that will not provide any relief to customers, there are several things that borrowers can do to minimise the likelihood of financial distress or default under a mortgage. Specifically, a borrower may decide to:
- apply funds in a redraw facility to monthly repayments, provided additional payments have been made against the loan. However, not all mortgages have a redraw facility;
- apply funds in an offset account to monthly repayments – though, we note that this may impact the rate of interest payable on the loan;
- switch from repaying principal and interest to interest only – this will decrease repayments in the short term though ultimately increase payments in the long term, as repayment of the principal amount is being delayed and additional interest payments are being made in the interim;
- re-finance the loan at a lower interest rate or with a more competitive bank;
- reduce mortgage repayments to the minimum repayment amount required by the bank; or
- request a variation to the terms of the loan on hardship grounds (see below).
Please note it is essential borrowers contact their bank and financial adviser to obtain financial advice before making any decisions regarding their mortgage. The above list of options is for illustrative purposes only and is not financial advice.
What happens if my financial circumstances do not improve after the repayment deferral period ends?
Customers continuing to experience financial hardship or some other difficulty in making mortgage repayments can submit a hardship variation request, or notice, to their bank.1 A hardship variation is a change to the terms of the loan agreement to make the loan more manageable for the borrower, having regard to their specific financial circumstances. A variation should not affect a borrower’s credit rating.
The following are common types of loan variations which may be granted by banks:
- a reduction in, or moratorium on, mortgage repayments;
- a reduction in interest rates;
- an extension of the loan term; or
- any other agreed variation (if the loan was advanced post-March 2013).
A person may suffer hardship if, for reasons of illness, unemployment or other reasonable causes (i.e. imprisonment or death of a family member) they are unable to make their mortgage repayments.
In most cases, banks will accommodate a genuine hardship request whether or not the terms of the loan agreement contemplate this, as the law pertaining to hardship is now governed by the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act). However, whether or not a request is accepted is solely a matter for the bank – the NCCP Act expressly provides the credit provider simply ‘need not agree’ to vary the loan.2 Accordingly, the request will be subject to the bank’s assessment of the borrower’s circumstances.
Regardless, a borrower should establish their reasons for seeking a variation (i.e. evidencing the ground(s) of hardship) and why they expect to be able to discharge their obligations under the loan agreement if the terms are varied.
If a bank refuses to grant a hardship request, a borrower is entitled to request the bank’s reasons for the refusal and, if unsatisfied with the reasons provided, lodge a formal complaint to the Australian Financial Complaints Authority (or other body as should be specified in the bank’s refusal letter).
If you would like further information or advice in relation to your mortgage or this publication, please don’t hesitate to contact our Banking and Finance team.
1 NCCP Act, Sch 1 cl 72(1)
2 See NCCP Act, Sch 1, note in cl 72(3).