9 Apr 2020

What does it mean to defer your loan?

Over the past few weeks, many clients have asked us about deferring their home loan repayments due to Covid-19. We understand that this is a tough time for many, and we hope this helps with your decision before making the request to your bank.

What is a loan deferral?

Loan deferral is a type of temporary financial relief offered by your bank or lender where for an agreed period of time, you won’t be obliged to make home loan repayments.

Who can apply for loan deferral

The banks are offering loan deferral to customers impacted financially by Covid-19. The impact from Covid-19 can be caused by:

  • falling ill;
  • losing your job; or
  • a reduction in income,

resulting in difficulties in making loan repayments. 

What can I do before deferring my loan?

There are practical ways to help ease the financial pressure during this time.

  • Review of your budgets and expenses, e.g. there might be expenses that can be reduced
  • Check your redraw – if you are ahead of your repayments, you may be able to access these funds
  • Negotiate your interest rate – ask your broker or bank manager for the most competitive rate you should be paying
  • Fix your loan for certainty over the repayment amount – please see our previous post about the banks’ fixed rate offers 
  • Check your direct debit if you haven’t adjusted it to the minimum repayment.

What other alternatives are there?

Besides a loan deferral, other types of financial assistance your bank can provide depends on your unique circumstances:

  • Switch your repayments to interest only temporarily
  • Reduce repayment amounts / extend your loan term
  • Restructure your loans and/or debts
  • Break your fixed term which might be on a high rate, where the break cost is acceptable
  • Switch to a different loan product.

How long can I defer my loan for?

The major banks are offering loan deferral for home loan customers of up to six months. Certain banks will review your case at the three month point.

What is my obligation during payment pause?

During the time of payment pause, the payments you are obliged to make are $nil.

Does it cost me anything?

No. There are no fees charged for these processes.

During payment pause, interest and your normal account fees will still be charged and added to your loan.

How is interest calculated?

Interest will be capitalised (added) to the loan balance. Therefore, after the payment pause, your repayments will be higher to ensure the loan is repaid within the loan term.

CBA and ANZ will extend the loan term so you can maintain your existing repayments.

Is a loan deferral recorded on my credit file?

We have been advised no adverse data will be recorded for a loan deferral.

On the other hand, if you have missed payments prior to applying for loan deferral, this will likely be reflected on your credit file.

Does it impact my ability to refinance in future?

There is no precedent to date to support this either way. Our best guess is unlikely if it is a case of a loan deferral due to Covid-19 and there are no missed payments.

We would suggest keeping accurate records of your job dates, incomes and any correspondence with your bank, so that when you refinance, any gaps in your financial history can be fully justified.

What if I’m on a fixed rate?

You should check with your bank about the applicable revert rates if the contractual end date of your fixed loan occurs during the deferral period.

Can I ask for another 6 months?

At this stage, this is unlikely, given there are no precedents.

Only NAB has said it will review your case if you request an extension beyond a 6 months deferral.

UPDATE: for customers who may need to defer beyond 6 months, check with your bank to discuss further support options.

How to apply for loan deferral?

Applications with most major banks can be made online:

Do I need to defer all loans? Or can I selectively defer my loans?

If you have more than one loan, when making the application, you will be prompted to select which account(s) you wish to defer repayments for

Please note for NAB, you’ll need to call to make the selection. Follow the online form above which will prompt you to call.

For assistance, please contact our team:

If you have a question that is not answered above, or would like to talk through your situation, please feel free to contact a member of our team.