Mortgage deferrals are winding up, so what happens next?
For six months people with mortgages have been able to pause repaying their loans. The offer, made by Australia’s banks to their home loan customers, temporarily stopped what is normally the biggest expense for many households.
Mortgage pausing, also known as a repayment holiday, was taken up on around one-in-10 mortgages.
Now it’s over. Millions of Australians need to start making payments again. What happens next is uncertain.
To understand the issue, let’s go back. Six months ago in mid-March coronavirus crushed the economy, almost overnight.
Swathes of businesses were forced to close to stop the spread of the virus and huge numbers of newly unemployed people queued in front of Centrelink offices.
With the Newstart payment for unemployed people below the poverty line, and the Morrison Government at that time knocking back calls for a wage subsidy, the immediate concern was how millions of Australians would keep a roof over their head.
The banks stepped in to offer a six-month pause on mortgage repayments. It had the double benefit of providing security for the 8 million people who rent homes in Australia, many of whom live in properties where the landlord has a mortgage on an investment property.
“I can say, to anybody who is individually concerned about their mortgage, there is assistance that banks can provide already,” Anna Bligh, chief executive of the Australian Banking Association, said on March 20.
“Anyone who is concerned should not hesitate to call their bank.”
The offer to pause mortgages was given out generously and taken up quickly.
For many customers, it was as simple as responding to an email.
The most recent August figures from the banking regulator, APRA, show that 9 per cent of housing loans, worth $160 billion, were still on hold.
For small business loans the proportion was even higher, 16.2 per cent, worth $53 billion. And that was slightly below the peak level, as some borrowers had already resumed repayments.
The offer wasn’t entirely selfless. The banks prevented a fire-sale of housing by over-stretched investors and didn’t have to incur massive losses due to surging defaults and bad debt write-offs.
The repayment holiday also simply added the interest to, or extended the term of, the loan. However, added administration costs mean they’re unlikely to have made any money on the offer.
Restarting the mortgage machine
Having created a time-bomb, policymakers and the banks now need to defuse it.
Since March, Newstart became JobSeeker, with a generous $550 a fortnight coronavirus supplement. A massive program called JobKeeper kept millions paid via a wage subsidy to employers. Both are now being wound back.
Gold Coast-based financial adviser Simon Enger put his mortgage on pause at the start of the crisis.
“My wife got stood down from work, and given the uncertain environment that was ahead at that point in time — there was no Governmental support — I thought it was a great strategy to put my mortgage on pause,” he said.
“I knew that we’d be right for a period of time, so I mean it was manageable, but I guess that you know you always looking for ways to mitigate risk as much as possible.”
Many people did as Mr Enger did, pausing their loan because of uncertainty about their situation.
Support offered by the JobSeeker and JobKeeper programs started after mortgage pausing became available and could explain why one-in-five people who deferred their mortgage actually kept making repayments.
In July, banks announced a four-month extension to the deferral program beyond its planned September end date, but warned it wouldn’t be automatic and that any customer who can afford to start repaying their mortgage or business loan will be expected to do so.
The banks can’t kick the problem down the road forever, NAB group executive for personal banking Rachel Slade said.
“Extending a deferral is only really an option where there’s certainty about returning to a sense of income to repay the debt,” she explained.
“Otherwise, really, the customers are just deferring an inevitable outcome and in fact the situation they might find themselves in later on is worse than facing it today.”
The number of staff dealing with hardship cases and customer queries has been increased at all banks, and institutions have been proactively contacting customers to find out their intentions as the pausing period ends.
“Often customers find themselves in these situations with a raft of things going on in their lives,” Ms Slade said, urging people to contact their institution as early as possible.
“People don’t get out of bed and decide not to pay their home loans.”
Banks have signalled they’re going to work to keep people in their homes by switching customers to lower payments or interest-only options. But investors who can no longer pause their mortgages might be pushed to sell into a falling market.
The boss of the nation’s largest bank and home lender, the Commonwealth Bank, didn’t sugar coat the message when he spoke in mid-August about the looming end of pausing.
“We will certainly do all we can to keep customers inside their home,” Matt Comyn told Elysse Morgan on The Business.
“Investment properties is a different proposition to a home that people live in, it really is going to depend on individual customer’s circumstances.
“Unless a customer is in default it is their decision, but of course if you can avoid that you would like to.”
‘Call your bank, and call early’
With so many people facing tough decisions, the financial industry regulator ASIC and consumer organisations are urging banks and customers to work together.
Karen Cox helps run the National Debt Helpline — where people can call and speak to a free independent financial counsellor when they’re having trouble with money and loans.
“One thing is absolutely clear,” the chief executive of the Financial Rights Legal Centre said.
“Whereas deferrals were given with very, very little contact or information in March, it will not be the same this time around.”
There’s concern that people are hiding from their problems.
The Australian Financial Review recently reported that one-in-five customers with paused mortgages were “ghosting” their lender — not responding to phone calls, text messages or emails.
“Research shows that the sooner people come to terms with the fact that they’re in trouble, speak to their credit provider and get some sort of arrangement in place … the greater the chances are that they’re going to come out the other end of this,” Ms Cox said.
Senior banker Rachel Slade agrees: “My key message for any customer who is feeling uncertain or unsure is to call your bank, and call early.”
Simon Enger’s situation has improved. His wife has found a new job and his Sydney-based financial advice business is looking more secure than it did in March.
He’s talked to his bank and worked out how to re-start payments. He’s urging people who’ve been in his situation to talk, not hide.
“Have the conversation with the lender, because they want to work with you as much as possible,” he said.
“They don’t want to be left with having to offload a whole lot of properties or make decisions in relation to people’s lives.”