Mortgage deep freeze still looking dangerous

When around one in every ten Australian mortgages “took a holiday’’, the idea was that it would be a temporary COVID-19 measure and repayments would begin again afterwards.

Now that time has arrived and after emerging from the deep freeze after six months, that tangled mass of frozen mortgages is proving very difficult to thaw.

The most recent August figures from the banking regulator, APRA (Australian Prudential Regulation Authority), show that 9% of housing loans, worth $160 billion, are still on hold.

Small business loans were even worse, with 16.2% worth $53 billion still frozen – only a little below the peak figure.

Thaw is very slow so far

In total during August, just $10 billion worth of loans were thawed, leaving $229 billion frozen – including that $160 billion in mortgages.

All of the banks are trying to project an image of calm and say they are in discussions with their customers to begin repayments again or negotiate different repayment options such as progressing to interest only loans or a longer loan holiday.

However, with the economic effect of the pandemic still very much with us and the government income assistance measures such as JobKeeper and JobSeeker beginning to wind down, we really have arrived at the crunch period.

Extensions push the problem into next year

It is true that in July the banks announced a four-month extension to the deferral program beyond its planned September end date, but even at that time they 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.

Another deadline to remember is the Australian Bankers’ Association credit rating amnesty which now extends until at least March 2021.

That means that banks will not report borrowers to credit agencies for missing payments as long as they were up to date with their repayments before their loan deferrals were granted.

From then onwards, credit ratings will start to be impacted.

Differences emerging between states and banks

This frozen mortgage problem can be kicked down the road for a while longer but it is getting much closer to reaching a head now and there are some interesting differences emerging between the banks and also between the states.

While Melbourne has suffered the worst lockdowns of any Australian capital city and the most negative effect on jobs, the worst state by far for persistently frozen loans is Queensland.

While Queensland has so far fared really well infection-wise out of the pandemic, with the state opening up ahead of most other states, the tightly supervised state border has effectively closed down the state’s large tourist industry to interstate and international visitors.

Credit analysis company Equifax said nine of the top 10 regions in the country where mortgage payments have been put on hold with the big four banks were in the Sunshine state.

Tourist areas hit hardest

The worst hit areas within Queensland are all tourism hubs including the Whitsundays, Noosa, Surfers Paradise, Coolangatta, Broadbeach-Burleigh, Mudgeeraba-Tallebudgera, Southport, the Gold Coast Hinterland and Cairns.

Similarly, some of the fringe suburbs of Melbourne have also been hit hard with frozen mortgages.

On the banking side, Commonwealth has basically matched the national trend with $5.7 billion worth of CBA’s deferred loans expired or exited during August, while only $2.3 billion worth of loans entered a new deferral or had their deferrals extended.

Overall, in August exits from loan deferrals outweighed new deferrals with $24 billion of loans expiring or exiting deferral, and $14 billion worth of loans entering deferral or having their deferrals extended.

On the August APRA figures which are the latest available the most exposed banks include Bank of Queensland, NAB, AMP and ME Bank, which all have more than 10% of their loans frozen.

NAB, the Commonwealth Bank, Bendigo Bank and Bank of Queensland all managed to exit many more customers than entered their hardship program.

So far, the big banks expect the total of bad loans at the end of the pandemic to be around $7 billion, although due to the unprecedented nature of the pandemic this should be treated as a little more uncertain than most bank predictions.

Once the loan extensions and holidays have been exhausted, those who can’t begin to repay their loans due to unemployment will be faced with the unappealing task of selling up and re-entering the rental market.