If you’re struggling with your home loan repayments, deferring them might sound extremely tempting.
Hitting pause on your repayments for a few months could give you some much-needed breathing space, and for some it might seem like the only way to avoid falling into arrears, or even defaulting.
However, it’s important you don’t think of deferring your repayments like a get out of jail free card – there are definitely strings attached.
While deferring might end up being the right move for you, there are a few things to consider first.
How to defer mortgage payments
Most home loan lenders don’t simply present a ‘defer anytime’ button in their app.
While many banks offered customers the option to defer repayments for up to six months during the pandemic, unconditional deferrals are now less common.
Nevertheless, if you’re in need of a temporary hiatus from your repayments, there are several options to choose from.
Repayment holiday or temporary reduction
Some lenders allow customers who are ahead on repayments to hit pause for a while, drawing down on excess funds in redraw facilities.
Commonwealth Bank, for example, offers borrowers the option to take a repayment holiday for three to twelve months. A similar feature offered by Westpac is called a repayment pause.
To make use of both features, funds available in a redraw facility need to exceed the total value of the repayments missed during the hiatus.
CommBank customers even need at least one extra month's worth of payments beyond the holiday period. So, for example, if you had $12,000 in your redraw and your monthly repayments were $3,000, you would only be eligible for a three-month repayment holiday.
During that holiday period, interest would continue to accrue on the outstanding loan amount.
The bank also only offers the option to defer repayments to borrowers with variable interest rate home loans, meaning conditions might shift if rates change.
If your repayments were to go up during your hiatus, making your available funds insufficient to cover the whole period you had planned, your ‘holiday’ might be cut short.
Hardship arrangements
If you’re struggling with your repayments because of a change in your financial situation, you could contact your lender’s hardship team for help.
Per the Uniform Consumer Credit Code (UCCC), a borrower has the right to seek changes to a credit contract on the grounds of financial hardship.
Reaching our for help might lead your bank or lender to put you on an alternative payment plan with reduced repayments, or allow you to postpone your repayments for a specific period.
Lenders are required to consider “in good faith” whether a request made on the grounds of hardship is “reasonably appropriate”. If you're turned down, ASIC offers an external dispute resolution scheme that you could appeal to.
Deferring payments through hardship arrangements is only available when there is a material change in your circumstances, such as job loss or illness.
Generally, interest will still continue to accrue while repayments are deferred, so any relief offered will only be temporary, as with the other options.
Interest only repayments
Another way to temporarily reduce your repayments is by switching to an interest only home loan.
As the name suggests, this means only paying the interest portion of your home loan repayments and repaying none of the principal balance.
While making interest only repayments isn’t exactly ‘deferring’ your mortgage payments, it might significantly reduce the amount you owe each week, fortnight, or month.
For example, let’s say you have 20 years and $400,000 remaining on a home loan and an interest rate of 6% p.a.
Your monthly principal and interest repayments would be around $2,865.72.
Switching to interest only repayments would reduce that to $2,000 per month, as per the Your Mortgage home loan repayment calculator.
Switching to interest only repayments can be a great help to borrowers experiencing a temporary income reduction, allowing them to cope.
For property investors, interest only repayments mean paying more interest each year (since none of the principal is repaid), which could help maximise potential tax deductions.
However, in the long run, signing on to an interest only home loan means paying more interest than you otherwise would, since you will owe more for longer. Once an interest only period expires, you might end up with more expensive principal and interest repayments than you otherwise would have.
The maximum length of an interest only period varies between lenders. At the big four banks, interest only periods are capped at five years for owner occupiers and ten years for investors.
Benefits of deferring home loan repayments
There are a few ways that pausing or temporarily reducing home loan repayments can be beneficial for borrowers.
Ease financial pressure (in the short term)
The most obvious benefit to deferring home loan repayments is immediate relief.
Mortgage repayments are the most significant regular expense for most people with a home loan, so deferring them can ease the financial burden.
This might particularly be the case for borrowers dealing with a sudden change in circumstances (job loss, illness, etc), as deferring mortgage payments could provide vital breathing space.
A break from making home loan payments could also be an opportunity to get your financial situation under control without the pressure of monthly mortgage dues.
For some people, relief from such stress might make deferring worth it.
Protect your credit score
Deferring mortgage repayments may also circumvent the impact that missing home loan payments could have on your credit score.
Struggling borrowers who have decided against pursuing a deferral due to the long term cost need to factor in the risk a compromised credit score presents. While a single missed payment, addressed quickly is unlikely to hurt your credit, lenders may report repeat offenders to the credit bureau. And if you end up defaulting, the effect on your credit score is likely to be severe.
A low credit rating can impact your borrowing power. You might find your maximum loan size capped or you could end up on the higher end of the spectrum when applying for products with tailored interest rates, like personal loans.
While deferring might mean paying more interest overall on your current home loan, it could save you money in the long run if you would otherwise default and you wish to take out other loans in the future.
Free up cash flow
Temporarily pausing or reducing your home loan repayments could free up your cash flow for other expenses.
It isn’t exclusively mortgage stressed borrowers who defer. Some people might turn to interest only repayments or a payment deferral to fund a major holiday or a wedding, for example.
In other cases, getting a whole lot of extra cash flow could make deferring an efficient investing strategy, even if it means paying more interest on the loan in question.
For instance, a borrower who is 20 years into a 30-year home loan and planning to take out a second loan to buy another property might be better off deferring or switching to interest only repayments on their existing loan so to make extra repayments on the new, larger loan.
Drawbacks of deferring your mortgage
There are also a couple of reasons deferring your home loan repayments might not be the miraculous solution it appears be.
Larger overall interest bill and longer loan term
If you stop paying down the principal amount you owe on a home loan, the interest payable will still continue to accrue.
Therefore, deferring or switching to interest only repayments means paying more interest overall, since you’d have borrowed a larger amount for longer.
It can also mean it takes longer to pay the home loan off entirely.
Only a temporary solution
Deferring payments can offer temporary relief, but it doesn’t mean you owe any less.
If you’re struggling with your mortgage because of an underlying issue – chronic overspending, for example – deferring without addressing the root cause of your financial woes will just kick your problem down the line.
If you’re struggling, it’s worth taking a closer look at why. There may be more permanent ways to address the issue.
If you’re burning cash on non-essentials, you could take a look at your spending habits. Or, if it’s high interest rates that are causing your problems, you might wish to explore whether refinancing is for you.
Should you defer your home loan payments?
The decision of whether to defer your mortgage payments or not will depend on your circumstances and long term plans.
Hitting pause or switching to interest only repayments might be the buffer you need to get yourself back on track. It could also be a handy way to navigate temporary income reductions.
However, the cost of doing so could be a larger overall interest bill, so it’s important to run the numbers first and work out whether deferring is your best bet in the long run.
If you’re still unsure, it’s worth reaching out to your lender or an independent expert.
Most lenders recommend those who are struggling reach out to their hardship team as soon as possible.
Even if you don’t end up with a hardship variation, you might get more clarity about your best move going forward.
Alternatively, a mortgage broker might have the experience needed to assess your situation.
Alternatives
If you’re struggling with your mortgage repayments, there are other potential sources of relief.
Refinancing to a lower rate, cutting non essential spending and consolidating other debts are alternative ways that could ease your financial burden.
In some cases, you might decide to sell your property in order to pay off the home loan. That’s particularly worth considering if you're in a positive equity position, as you will likely come out in the green following the sale.
Picture by Andrea Picquado on Pexels
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