Australia’s banks have once again come to the party in extending loan repayment holidays until January but there is a limit to how long they can keep kicking the can down the road.
While business owners have been more enthusiastic about embracing mortgage repayment holidays than home owners, by the end of May Australian Prudential Regulation Authority (APRA) figures showed that repayments had been frozen on $266 billion of loans.
The figures also show this is the equivalent of one in every ten Australians who are not making payments on their mortgages at the moment – and one in five businesses – due to the impact of the COVID-19 pandemic on the economy.
With Melbourne now locked down for a further six weeks at least and the JobKeeper and JobSeeker programs due to begin winding down in September, there is even a chance that the January extension may need to be extended further.
Plenty of borrowers are swimming naked
However, just like Warren Buffett said, it is only when the tide goes out that you find out who has been swimming without bathers.
No matter how long the mortgage repayment holiday lasts, there will be some businesses and home owners who face the prospect of selling up – which will be a major test of the property market.
It is also worth remembering that all of these loans are still accruing interest which will add to the total loan amount at the end of the repayment freeze – which will normally increase repayments and the loan term or both.
That means these loans will become more difficult to service not less, which means that those servicing those loans will need to have an income at least as good as they had before the crisis hit.
Higher repayments will challenge many
That will be a challenge for anyone who has lost their job or any business that needs to build up after an extensive period of hibernation.
The banks like to trumpet the fact that they are communicating with their customers and some are already resuming repayments but the APRA figures are not nearly as bullish.
In May, the number of those leaving assistance programs was dwarfed by those joining them, so that picture is unlikely to change quickly, although the situation may be improving in states that are reducing their COVID-19 restrictions.
Before the crisis began, fewer than 2% of loans were not being repaid, so it will be a difficult task getting back to that figure from above 10%.
Some bankers admit it may be better to sell
Senior ANZ banker Mark Hand let the cat out of the bag recently when he admitted to the Sydney Morning Herald that some customers who can’t resume mortgage payments will need to consider selling their properties.
While Mr Hand said many customers were able to resume repayments, some would struggle and it made little sense for them to keep accruing interest indefinitely.
“We’re not forgiving repayments, the interest is being capitalised,’’ said Mr Hand, who is ANZ group executive of retail and commercial banking.
“So, whilst interest rates are low, the debt that you have at the end of the deferral period is higher than what it otherwise would have been. So that will put a strain on the cash flow of a family or of a business,” he said.
“The growth that you might have anticipated might not come, so at some stage you’re going to have to say: ‘If I can’t afford this mortgage, am I better off to rent, put my capital aside and wait until I’m in a better position to buy back into the market?’”
“I just think there are people who are going to have to make those decisions in the next few months.”
His comments have been echoed by NAB CEO Ross McEwan, who said while some customers would need more help, others should start paying their loans back.
“The deferral has provided some much-needed relief, but we are encouraging customers who can begin repayments to do so as soon as they can,” said Mr McEwan.
“It is in the customers’ interest to repay debt sooner.”