The Reserve Bank of Australia cut the cash rate twice in March and it’s now at a record low of just 0.25 per cent.
The Reserve Bank of Australia cut the cash rate twice in March and it’s now at a record low of just 0.25 per cent.

The dangers of taking a home loan holiday

The short-term gain of mortgage deferrals for stressed out borrowers will equate to thousands of dollars in losses in the long term, new data shows.

Financial institutions have been bombarded by requests from customers to put on hold their repayments on mortgages, credit cards and personal loans but experts are urging caution.

Lenders still calculate interest charges during the deferral period and these are added onto the loan balance once the period ends.

The Reserve Bank of Australia board meets on Tuesday - the third time in five weeks - to decide whether to cut the cash rate again, this time to just zero per cent.

But new data from financial comparison website Mozo showed if owner occupier borrowers paying principal and interest on a 30-year loan with a rate of 3.5 per cent deferred their loan for six months at the five year mark, they would end up paying an extra $4000 in interest charges.

This is presuming the loan term stays the same.

Borrowers who defer for six months and go a step further, adding six months onto the end of their loan term, would pay an additional $7070 in overall interest costs.

Mozo's spokeswoman Kirsty Lamont said for those who had lost their job taking a mortgage holiday was "a vital lifeline".

Mozo spokeswoman Kirsty Lamont said mortgage deferrals should be done caution.
Mozo spokeswoman Kirsty Lamont said mortgage deferrals should be done caution.

"But it's not without a significant cost," she said.

"Borrowers who are considering pausing their home loan need to be aware over the long term this could cost them thousand of dollars.

"It's really worth working out a plan of what you'll do at the end of the six-month holiday period and once you are back in income stability how you can focus on trying to pay down your loan."

Mortgage interest rates have continued to tumble and many deals now have a "2" in front, which should prompt borrowers to check their deals and ensure they are not paying too much.

Homeloanexperts.com.au's managing director Otto Dargan said borrowers were in a good position to get rock-bottom rates and bring down their repayments to the lowest levels he had ever seen.

"We're seeing fixed rates as low as 2.09 per cent which are well below variable rates despite most economists predicting that rates are unlikely to fall further," he said.

"If their predictions are correct then fixing now is an excellent idea unless you need the flexibility of a variable rate loan."

HSBC chief economist Paul Bloxham said the cash rate would not fall further and instead the focus for the RBA was financial stability.

"They are already delivered a great deal of stimulus and will continue to do so," he said.

He said home loan rates would be likely to stay at record low levels for some time yet.

sophie.elsworth@news.com.au

@sophieelsworth



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