Mortgage Forbearance Agreements Australia 2025: Essential Guide

As Australian households continue to grapple with high interest rates and persistent cost-of-living challenges in 2025, more homeowners are turning to mortgage forbearance agreements as a temporary lifeline. Whether triggered by job loss, illness, or inflation-driven budget blowouts, these agreements offer borrowers breathing room—but also come with long-term considerations.

What Is a Mortgage Forbearance Agreement?

A mortgage forbearance agreement is a formal arrangement between a homeowner and their lender that temporarily pauses or reduces mortgage repayments. Unlike refinancing or a repayment holiday, forbearance does not eliminate your obligation—it simply delays or modifies payments for a set period, typically three to six months, but sometimes up to 12 months depending on the lender and circumstances.

• Who is eligible? Homeowners experiencing temporary financial hardship—such as job loss, illness, or a reduction in income—are the primary candidates.
• What happens to missed payments? The unpaid amount is generally added to the loan balance, extending the term or increasing future repayments once the forbearance period ends.
• Does interest accrue? Yes, in most cases, interest continues to accrue on the paused or reduced portion of the loan.

2025 Policy Updates: What’s Changed?

The Australian Prudential Regulation Authority (APRA) and the major banks have updated hardship protocols in 2025, responding to the elevated number of borrowers under mortgage stress as rates have remained high. Key changes include:

• Streamlined application process: Most lenders now allow online applications, with faster assessment times—often within 5 business days.
• Greater flexibility: Banks are more willing to tailor forbearance terms, including partial payment arrangements and interest-only periods.
• Credit score protection: Lenders are required to report agreed forbearance arrangements as ‘financial hardship assistance’ to credit agencies, which is less damaging than a missed payment default, but may still impact future lending decisions.

In the 2025 Federal Budget, the government reaffirmed support for mortgage relief initiatives, encouraging lenders to offer temporary hardship solutions before considering foreclosure or forced sales. This is a direct response to the uptick in arrears seen throughout 2024 and into early 2025.

Risks and Considerations: Is Forbearance Right for You?

While forbearance provides immediate relief, it’s not a free pass. Homeowners should weigh the following:

• Higher total interest costs: Pausing payments means interest keeps accumulating, potentially adding thousands to your total repayment over the life of the loan.
• Balloon payments or increased repayments: At the end of the forbearance period, you may face larger repayments or need to extend your loan term.
• Impact on refinancing: Having a recent forbearance on your record can make it harder to refinance or borrow in the short term, as lenders assess your risk profile more conservatively.
• Alternative options: Some borrowers may be better served by loan restructuring, switching to a fixed rate, or downsizing, depending on their long-term financial outlook.

Real-world example: In Sydney’s western suburbs, a dual-income family lost one income stream in early 2025. Their lender approved a six-month forbearance, reducing repayments by 70%. When both earners were back at work, the family resumed normal repayments, but their loan term was extended by eight months and they paid about $4,200 extra in interest over the life of the loan.

How to Apply and Prepare

If you’re considering forbearance, preparation is key:

• Contact your lender early—don’t wait until you’ve missed payments.
• Gather documentation: proof of hardship (e.g. redundancy notice, medical bills), current income, expenses, and assets.
• Ask detailed questions about how the forbearance will affect your loan balance, repayments, and credit report.
• Consider consulting a financial counsellor to explore all options and budget for post-forbearance repayments.

Most major Australian banks and non-bank lenders have dedicated hardship teams and online portals for applications in 2025. Approval is not automatic, but lenders are under pressure to work with borrowers to avoid unnecessary defaults.

The Bottom Line

Mortgage forbearance agreements are an important tool for Australians facing temporary financial hardship in 2025. They offer breathing room, but come with longer-term costs and credit implications. If you’re feeling the pinch, understanding the process—and your alternatives—will help you make a more confident decision for your financial future.