Page last updated on 08/07/2020
What has not changed
- Lenders can still repossess homes (if the loan is in default)
- Lenders can start legal proceedings to seek a court judgment for a debt and an order for repossession (if the loan is in default)
- You should always check if the lending for the home loan was irresponsible and run a dispute if it was
- Just because a bank has provided a six month deferral, followed if needed by a further four month deferral, doesn't mean that they cannot provide further hardship assistance.
What do the changes mean?
- The banks have been able to make these special changes due to the pandemic because of an agreement with APRA (the Australian Prudential Regulation Authority). This has meant that the banks haven't had to record deferred loans as impaired in the normal way. (The ACCC also had to approve the banks all offfering the same thing)
Many clients will have deferred their home loan repayments for six months in the early stages of the pandemic
Banks will check in with customers at the three-month mark and again toward the end of any six-month deferral
It is in your client's best interests for them to return to regular repayments where it is affordable to do so
Other customers may need to restructure or vary their loan. Options that may be available include: extending the length of the loan, converting the loan to interest only payments for a period of time, consolidating debt or a combination of these and other measures
If a client cannot afford to return to regular or reduced repayments, they can request a further four-month deferral under the pandemic arrangements. This deferral can only be for an aggregate period totalling 10 months or 31 March 2021, whichever is earlier.
It is important to remember that hardship options still apply outside of these arrangements and you can put forward an arrangement that you assess as suitable for your client's circumstances with supporting documentation. (This would mean that the bank would have to record the loan as impaired and you will need to explain why there is a reasonable prospect that the customer can repay)
Where there may be a mortgage and credit card or other debts with the same bank, consider advocating for a waiver or reduction fo the unsecured debts to give you clients the best opportunity of returning to affordable mortgage repayments when their circumstances improve
The risk of respossession and enforcement remains although it is very likely that major banks won't take that step
There should be greater flexibility in making repayment arrangements given the pandemic
You need to consider immediately cancelling the direct debits for any repayment arrangements your client can no longer afford. Talk to the lender about different methods for making payments
What do you do differently?
- Do inform the lender if your client has been financially affected by the pandemic
- Do let the lender know if your client is receiving JobSeeker or JobKeeper payments.
- Deferring repayments is very problematic for your client’s long-term financial future and should be avoided if at all possible. See below Common problem: Deferrals.
- Make sure you consider the following issues in negotiations:
- Late fees and default/legal fees not to be charged
- Attempt to negotiate on the interest rate (although this may be very difficult given interest rates are already low)
- Ask if the loan term can be extended (if that will assist)
- Repayments must be affordable
- Ask for your client’s credit report to be marked as paid for the purposes of repayment history information (“0”) if a repayment arrangement is made (and your client keeps to it). For clients already in default at the time of the deferral some banks will stop reporting RHI. See Credit reporting
- Always ask that you and your client be clearly informed if the lender intends to start enforcement action
Common problem: Surrendering the home
The pandemic means that the risk of home repossession may be reduced and that it may be difficult to sell a house. For these reasons, surrendering the home should be a last resort because the sale may create a shortfall.
Instead, clients need to keep paying as much as they can of their home loan repayments and think of them as rent. When the housing market improves the client can consider selling their home if their financial situation has not improved.
Common problem: deferrals
A deferral on a large home loan (or any home loan) of up to ten months will mean a larger debt because of compounding interest. Clients should therefore be discouraged from deferring payments.
Clients should consider home mortgage costs as an essential payment. If they are in financial difficulty, the following options should be considered (from best option to worst):
- Keep making the usual home loan repayments
- Make interest-only repayments
- Make payments of an amount the client can afford (with affordability calculated around the home loan repayment being a high priority)
- Negotiate reduced payments, a moratorium or a waiver on unsecured debts to assist the client in affording regular or reduced mortgage repayments
- Negotiate a deferral
Under no circumstances should a client defer their home loan repayments only to pay their credit card (or another low priority debt).
Persuading clients not to accept a deferral of repayments may be difficult. Some suggested reasons to make payments are:
- Shelter (your home) should always be a high priority payment
- Compounding means a large debt will get a lot larger (even in just a few months – read Why lenders don’t mind if you cut your mortgage payments)
- If the client finds it hard to recover financially after the pandemic (for example, get employment) then the home is at risk of repossession
- Paying off a home loan builds future financial stability
FCA Toolkit - Bank responses (home loans)
“Why lenders don’t mind if you cut your mortgage payments”; The Sydney Morning Herald, April 21, 2020.