The only product a bank has is risk! It’s packaged a hundred different ways; lending, deposits, credit cards, trading, derivatives, foreign exchange . . . the list goes on. But the main one that we care about today is home loans.
When the COVID-19 pandemic hit Australia in March 2020 the outlook for the impact that this would have on our daily lives from a lifestyle, health & financial perspective, was catastrophic. The government, the healthcare system & the banks all pulled levers to mitigate the downside based on what they could see happening in Europe.
The Morrison government put in place JobKeeper to take the pressure off businesses & keep people technically employed, albeit at reduced income. They increased JobSeeker to a more liveable level. Infrastructure projects were fast tracked to ignite the economy & create employment.
Our health care professionals & other essential services stepped up to the challenge, continuing to put their own lives at risk.
Banks, concerned about the property market “falling off a cliff” instigated measures to relieve borrowers of their loan commitments through the crisis by deferring loan repayments for up to 6 months.
- Did they act too quickly?
- Was this in fact the right thing to do?
As well intentioned as it may have been, the problem with the loan deferral mechanism is two fold.
- Many borrowers don’t actually realise that the their interest is accumulating & that when we come out of this their loan could have a balance of $10,000 more than the last time they looked at it!
- Completely eliminating the responsibility to meet obligations is detrimental to the borrowers habits. Reducing the payments to a manageable level is an alternative worth considering.
In hindsight, rather than deferring payments (ie $0 repayment per month), banks should have switched loans to Interest Only & that’s what they should be doing now rather than talk of loan defaults that only creates an unnecessary panic.
People have to live somewhere! With interest rates at historic lows, switching borrowers to Interest Only rather than triggering defaults is a much more feasible & manageable alternative. Looking at 3 examples in the table below, if banks switch borrowers to “a special 6 months / 1 year COVID Interest Only Fixed Rate”, the repayments for the majority of borrowers will be less than the JobKeeper payments & materially less than the alternative of rent at current levels. In most cases, the borrowers are couples so even if both are on JobKeeper they can still manage the loan repayments with a modest lifestyle for the coming months.
|Property Value||Loan Balance||LVR||Interest Rate||Principal & Interest Payments||Interest Only Payments||JobKeeper (@ $1,200 per fortnight)||Rent|
(as the alternative)
This option is a win / win / win!
- Obviously it’s a win for the borrower who gets to stay in their home with the enormous pressure (& all its negative consequences) of how to survive the next year off their shoulders.
- For the banks, they can take a sigh of relief that they are not the big bad wolf preying on vulnerable home owners. They will still be able to maintain their balance sheet, capital base & revenue stream to keep the shareholders & regulators happy.
- Finally it’s a win for the government who will get through this crisis with one less problem to worry about as the property market ticks along at a reasonable level.
This is how a free & fair capital market should work. Let’s see if the bankers can broaden their minds & look beyond the short-termism that has become endemic in their ranks to a long term solution that works for everybody.
The alternative is not an option. It will create a downward spiral in the property market where there is an over-supply driven by forced sales together with an over-supply of rental accomodation that these defaulters can not afford to live in & finally a new class of homelessness that could have been avoided.
If you need to discuss restructuring or refinancing your home loan, please contact us to arrange an obligation free appointment.
The views above are an opinion & do not constitute financial advice.