Borrowers finding it hard to refinance following loan deferral

According to the Australian Banking Association, just 82,000 Australian borrowers are currently on home loan deferrals after one in 10 borrowers took a “repayment holiday” because of COVID-19. While those numbers paint a positive picture, MPA can reveal that some borrowers who paused their home loan repayments in response to the COVID-19 pandemic have found it difficult to refinance to a cheaper rate loan following the end of the repayment holiday.

Loan Market Geelong director Sarah Thomson told MPA that despite lenders claiming COVID-19 repayment holidays wouldn’t damage borrowers’ creditworthiness when the scheme was introduced early last year, some borrowers have now been told they need a clean bill of repayments before they can be considered for a refinance.

Read more: Is it too soon to end repayment pauses?

“We have had a couple of banks saying that they want to see clients repaying their loans for three months, but that’s not what we were told going into COVID,” she said. “It was seen more in the sense that there’s going to be this pause, nothing that happens within this period is going to matter.”

Finance Made Easy director Tony Bice has experienced a similar trend. He has been contacted by borrowers on repayment pauses who were looking for a cheaper rate home loan, but when Bice approached the potential incoming lenders he was given a less than favourable answer.

“The bank that’s taking on the loan is not that willing to take them on because there is a warning flag there,” he said.

This has proved especially frustrating for clients who took the pause with the understanding it wouldn’t affect their borrowing power moving forward.

“A couple of the clients I’ve spoken with have said: ‘had I known that, I probably wouldn’t have taken up the repayment holiday’,” he said.

Connective executive director Mark Haron has also come across instances where borrowers have found it difficult to refinance because of a repayment pause.

 “This issue has been raised with me in a number of instances,” he said. “In one instance it was a simple product switch within the same lender which would have saved the customer a significant amount of interest.”

The borrower contacted the bank directly to make the switch but was told that even though they had started making repayments again, they were in “four months’ repayment pause arrears.” The customer’s broker then tried contacting the bank but was told the same conclusion, before Haron himself contacted the bank’s senior management and had the issue resolved within two weeks.

Read more: Mortgage arrears set to rise – Fitch

“Lenders’ policies going into this was for it not to be a blemish on someone’s financial record going forward but unfortunately we’re seeing some banks not abiding by how it was originally designed to work,” he said. “What makes this even more difficult is that there were a lot of people who just automatically went on repayment pauses with the lender they were with because they thought it was a good idea.”

Due to the speed at which lenders needed to implement repayment pauses at the onset of the pandemic, it is possible that many borrowers who didn’t really need to defer loan repayments were given the green light on their applications, he said.

Thomson said despite the many conversations she had with her clients around the repercussions of deferring home loan repayments, some decided to apply for a pause when they didn’t really need to.

“They hadn’t even lost their jobs, they still had really good incomes, but it was just like a breather – it was like some people did it to catch back on life, to bank a bit of cash and put some savings away,” she said.

Bice told a similar story; one of a deferred borrower who contacted him for a better rate explaining they had only taken the pause because they “thought everyone was doing it.”

According to Haron, while some borrowers are facing challenges when trying to refinance, all of the lenders he has spoken with on the matter have “reiterated that they will apply their normal lending policy and not have a tougher stance on people on repayment pause.”

 “The caveat there is that the customer has shown they’re back making repayments and that they show they can continue to make the monthly repayments,” he added.

Any lenders who refuse to refinance a customer purely because they have been on a repayment pause should be called out, he said.

“It’s a breach of what the intention of that program was and I’m sure the government would be interested in that,” he said.