This is in recognition of how tough some people are doing it as a result of the economic shutdown and widespread job losses due to the coronavirus pandemic.

Each bank has its own policy, but the general rule is you can press pause if you have lost your job or your total income has dropped by 20 per cent.

Some banks are happy for you to phone them and let them know your circumstances have changed. Others will need to see a letter or email that proves you have lost your job or your pay has taken a hit since January, 2020.

• A guide to the Australian property market during COVID-19

Pausing your mortgage has consequences

Lenders aren’t going to simply forget about you making repayments for a few months.

“The bank won’t let you off scot-free,” says Alex Jamieson, financial planner and founder of AJ Financial Planning.

The interest you accrue while you’re not making payments will still be added to your loan balance each month.

Let’s say you have a $350,000 mortgage and normally pay $729 in interest each month. This amount will still be added to your loan each month it’s paused, which is called capitalising the interest on your loan.

“Your minimum repayment after the repayment pause will be higher,” says Brendan Dixon, a financial adviser with Pure Finance.

“You pay more interest in the long term if you do take a repayment holiday,” he adds. “So only do this if it’s absolutely necessary.”

Asking for a mortgage holiday could be the best path to follow if it means the difference between keeping your property or having to sell when it doesn’t suit you.

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How repayment holidays work

At the moment banks will let you press pause for the next three months. Some will also waive late payment fees.

“Some lenders are offering reviews after three months,” says uno Home Loans chief executive Anthony Justice. “They will then determine if a further three-month holiday is the right thing to do, but this differs from lender to lender.”

It’s also important to understand that each bank’s pause mechanics vary, as does the eligibility criteria. “Some banks restrict assistance to owner-occupiers while others also have provisions for investment property loans,” says UQ Business School lecturer Dr John Sturgeon.

Pressing pause is also not the only option if you’re struggling to pay your mortgage, notes Sturgeon.

“You could also reduce your payments for a period to help you through tough times rather than pausing the full loan repayment.”

“You could also access funds in your redraw facility if you’re ahead on your payments,” he adds. “Switching to interest-only payments for a period of time to reduce financial stress could also be an option.”

What to do if you’re facing financial hardship

Each bank has a dedicated financial hardship department. So as a first step, go to the financial hardship section on your lender’s website and fill in the online form on this page.

“Processing time at the moment is up to three weeks,” says Dixon. “So send in your application as soon as possible.”

Avoid making a hardship application if your situation hasn’t changed. Banks are doing all they can to help people with genuine needs, so if you don’t need help, leave your lender’s resources free for people who genuinely need them.

It’s also important to understand you won’t automatically be offered the chance to press pause on your home loan.

“Offering a pause is at the lender’s discretion,” says Sturgeon. “Banks are businesses and they need weigh up the risk of offering a pause to customers who are not in a position to sustain a loan long term.”

You will get short-term relief if your bank approves you to pause your mortgage. But if your situation doesn’t change, you do need to have a financial plan beyond six months. This is because there’s currently no talk of extending this period of leniency beyond that time.

Make sure to keep your bank fully informed of your financial position if you are struggling with your repayments and ask about any assistance that’s available.

You may be surprised at how open the banks are to negotiation after the drubbing they received during the financial services royal commission for failing to respond appropriately to customers in financial dire straits.

Which is great news for home owners with a mortgage – and an important opportunity for people to refinance their home loans to get the best rate possible.

Here’s a rundown of some of the financial institutions with the most compelling offerings.

Have the banks passed on the RBA rate cut?

Dominic Beattie, editor of loan portal savings.com.au, notes most lenders have passed on the full 0.25 per cent cut to the cash rate the RBA made this month. “By comparison, fewer than half the lenders passed on the full 0.25 per cent cut to the cash rate when it was lowered in October.”

He notes there are more than 100 lenders in the market in Australia, so there’s a lot of competition. “About 80 per cent of borrowers get their loans from the big four. So challenger banks and non-bank lenders are trying to shake up the status quo by offering really competitive home loan interest rates.”

When it comes to passing on any cut to the cash rate the RBA makes in April, Beattie says institutions with riskier customers or those without a big deposit base may not pass on as much of the rate cut as some of the banks with stricter lending criteria.

Some of the smaller, customer-owned banks also don’t have as much capacity to pass on rate cuts. This is because they rely on their net interest margin to make a profit. The net interest margin is the difference between what they pay to their deposit customers and what they charge to borrowers on their home loans.

“Whereas, smaller, non-banks have the flexibility through the securitisation markets and other funding sources to pass on that 25 basis point cut,” Beattie said.

Upfront costs calculator

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Repayments calculator

See how much your monthly repayments would be.

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Equity calculator

Calculate how much equity you may be able to access.

Calculate

Domain Loan Finder, Credit Representative 500208 of Auscred Services Pty Ltd, Australian Credit Licence 442372.

Which banks have the lowest interest rates?

For mortgages being refinanced, loans.com.au is offering the best variable comparison rate at time of writing, with a rate of 2.55 per cent, based on a loan-to-value ratio of less than 75 per cent.

Athena is also offering a variable rate of 2.55 per cent for owner-occupiers with a principal and interest loan.

Ubank has a comparable variable rate of 2.84 per cent for its owner-occupier, principal and interest loans of more than $200,000.

Westpac is the most competitive big bank, with a comparable variable rate of 3.29 per cent on its principal and interest loans.

Archer Mortgage Group finance broker Jasjeet Makkar says borrowers should not be concerned that taking out a loan with a non-bank lender is any more risky than taking out a loan with a big player. “Many are backed by a bank.” For example, Ubank is backed by NAB.

Also, thanks to the financial services royal commission, many non-banks conform to the same responsible lending guidelines as the big banks.

Should you refinance now or later?

If you’re thinking of refinancing, it might be a good idea to wait until next month when the RBA is expected to drop the cash rate to 0.25 per cent. It can take a few weeks after a rate cut for all the financial institutions to announce their new rates. So borrowers can take their time approaching their banks about refinancing.

It’s worth doing the legwork to compare rates yourself – even if you are working with a mortgage broker. Also remember the absolute cheapest rate might not be the best fit for you. For instance, really cheap loans may not include features like an offset account.

Akshaya Naronikar, chief executive of mortgage broking firm Iridium Private, agrees that getting the best mortgage product is not always about the rate. “There are other variables to consider, such as whether the loan gives you access to an offset account linked to the home loan. Funds in the offset account will reduce the interest you pay on the mortgage. ING’s loan doesn’t offer this feature.”

Everyone’s situation is different and the right loan will depend on individual circumstances. But Beattie says fixing your rate might be sensible if you want to reduce your interest over time.

“The RBA is probably only going to cut the cash rate one more time. That could be the bottom of the market. So it may be an opportunity to lock in a really cheap, fixed-interest rate for three years.”

ING is leading the fixed market at the moment with a rate of 2.49 per cent over three years.

But keep in mind fixed loans generally limit your ability to make extra repayments. You’ll also face break fees of thousands of dollars if you want to get out of the loan.

Whatever your circumstance, it’s certainly worth shopping around to get a feel for the market and talking to your financial institution or mortgage broker about whether you can get a better rate on your home loan.

Lindfield houses came out on top, earning $198,471 more than many households did in the year ending December, according to Domain data.

The median house price for the upper north shore suburb jumped 12.5 per cent to $2.7 million – an increase of $300,000 over the year, nearly triple the post-tax annual household income of $101,529.

It comes as wage growth stagnates and property prices rise this year off the back of a remarkable turnaround last year.

Multiple rate increases, relaxed lending criteria and certainty around housing policies fuelled the turnaround last year, but this year a shortage of homes on the market coupled with a surge of buyer demand have continued to push prices up.

Other suburbs where house price growth out-earned the average median income included Cammeray, which grew 11.7 per cent – or $237,500 – compared to the average median household post-tax income of $96,144 and wages growth of 2.2 per cent.

It was followed by North Bondi, where the median house price jumped 9.2 per cent – or $189,000 – to $2.795 million, compared to the average median household income of $102,627.

Domain senior research analyst Nicola Powell said some of these suburbs have led the recovery because they also led the downturn.

“When you have a look at recovery of prices, those higher priced areas have rebounded first,” Dr Powell said, adding that there was a broader rebound across the city to varying degrees.

“Many of these areas are family-orientated, owner-occupied dominated areas.”

Sydney suburbs where price growth outpaced household income

For Tim Cohen, who works in construction, listing his Lindfield property was a matter of timing despite loving the area and the house and being reluctant to let it go.

“I had the option to sell last year but I decided not to. We were holding onto it because we loved Lindfield and the house,” he said. “We have timed the market well, but then again I didn’t need to sell. I wasn’t going to sell in a down market either.”

McGrath Lindfield selling agent Sarah Davis said the area was highly sought-after for its proximity to shops, schools and the local train station.

“The more attractive a suburb becomes, the more wealthy it becomes … it drives the prices up and becomes a destination suburb.”

CommSec senior economist Ryan Felsman said the strong unit price recovery in Rushcutters Bay was an anomaly.

“It stands out because it’s well-positioned and it’s going through a renaissance with its gentrification,” Mr Felsman said. “A lot of enhancements [are being made] to older buildings and redevelopment of shop fronts and businesses that were victims of the lockout laws.

“It’s highly sought-after by young professionals who would have high disposable income.”

Marsfield and Parramatta were also among the top 10, where house price growth outpaced their post-tax household incomes by $72,004 and $69,363, respectively.

Mr Felsman said both were beneficiaries of improved transport links and infrastructure projects, becoming highly sought as a result.

“Marsfied would do well firstly in terms of houses because there’s not many, it’s mainly apartments. Certainly Macquarie University is nearby and the broader Marsfield technology park-focused sector is within walking distance and there’s a train station as well.”

He said Parramatta was benefitting from the light rail project, the western Sydney metro as well as a whole host of other projects, including the relocation of the Powerhouse Museum, an upgrade of Western Sydney University campus and the recent completion of the BankWest Stadium.

Outside of Sydney, Burradoo in the Southern Highlands recorded a strong recovery with its median house price jumping 12.3 per cent – or $187,500 – to $1,712,500 compared to the area’s median household post-tax income of $73,897.

About 60 per cent of homes in the postcode are owned outright, according to Dr Powell.

“Residents in the area are real winners … almost 60 per cent of residents in the area are couples without children … it indicates a real retirement suburb and it’s one of the most elite suburbs in the Southern Highlands.”

EY Oceania chief economist Jo Masters said there were expensive costs associated with owning a home with a mortgage as opposed to owning it outright.

“Your home is not liquid. That money doesn’t land into your bank account every month,” Ms Masters said.

Grattan Institute research fellow Brendan Coates said rising house prices wiped out almost all improvements in affordability in the recent downturn.

“We’re seeing a growing divide once again between the housing haves and have nots, especially in Sydney,” he said. “Home owners’ wealth has surged again recently due to rising house prices. Younger people and those with lower incomes who have missed out on buying a house are again being left behind.”