Borrowers who move to an interest-only loan following the expiry of their loan deferral period should not be charged a higher rate, according to RateCity.
The financial comparison website has argued that home loan customers who have been affected financially by the coronavirus pandemic should not have to pay a higher rate if they can only afford to make interest-only repayments on their loans when their six-month loan deferral period expires.
Australian banks recently announced that they would extend mortgage repayment deferrals by another four months were appropriate for customers impacted by COVID-19.
Customers who cannot return to repayments or restructure/vary their loan, either by extending the length of the loan or converting to interest-only repayment for a period of time, may be able to extend their repayment deferral by another four months (ending no later than 31 March 2021).
The Australian Banking Association (ABA) said shortly after that banks would offer alternatives to repayment holiday extensions, including temporary conversions to interest-only repayments.
The Commonwealth Bank of Australia (CBA), Westpac, and NAB have all confirmed that customers who move to interest-only terms after a deferral will have their rates aligned to the banks’ interest-only products.
However, ANZ has not confirmed which rates customers will be charged if they move to an interest-only loan.
The Australian Securities and Investments Commission (ASIC) recently outlined its expectations of lenders when loan repayment deferrals expire.
It said lenders should implement processes that are flexible enough to allow staff to offer tailored assistance than genuinely fulfils a customer’s needs.
Sally Tindall, research director at RateCity, said that while transferring to interest-only can be a useful temporary solution as the repayments are lower than normal, three major banks have confirmed that the COVID-19 affected customers are likely to be charged a premium for moving to this type of loan, although they will be reviewed on a case-by-case basis.
“The banks have been told by ASIC to be fair and flexible in their negotiations, and to help people stay in their home, if it’s in their best interests,” Ms Tindall said.”
“Yet some banks are planning on charging COVID-affected customers a higher rate if they switch to interest-only repayments.
“These customers should be getting a rate cut, not a rate hike. Asking people to pay more interest when they are in financial distress doesn’t seem fair or reasonable.
Ms Tindall has called on customers to ask banks for a rate cut when they call to alleviate some financial pressure.
“They’ve said they are here to help. Hold them to it,” she said.
“Ask for a rate cut, especially if your rate is higher than the new customer rate. If you are in financial hardship, you should not be paying more.”
Further, she recommended that customers should check that they are on an appropriate home loan, and cease paying for an offset if there is no money in there. She also said customers should ask for their annual fee to be waived this year if they pay one.
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Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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