Banks offer further four-month holiday to avoid September plunge

As the government tries to control Australia’s economy as it hurtles towards a further crisis in September, the banks have agreed to offer struggling customers four months more of a mortgage repayment holiday.

The measures, announced today, will only apply to hard-pressed cases among the 779,458 loans which have repayments paused.  That’s a total of $236 billion.

With predictions that employment numbers will continue to fall, the move by the banks is the first in what is likely to be an acceptance that aids like JobKeeper and JobSeeker payments will have to be extended as the economy waits for some clear direction from the onslaught of COVID-19.

The total deferral period will now be 10 months for households and businesses unable to restructure their debt or restart paying. The banking regulator brought the banks together to facilitate the move.

However, while this additional deferment period will take some of the pressure off homeowners in the immediate future, the reality is that, for many, it’s just delaying financial pain that will come later down the road.

During the deferral period, interest continues to accrue – meaning the total amount owing on mortgages will actually be greater when payments resume in early 2021. This means that customers will either be forced to make higher monthly repayments or will have the lifetime of their loan extended by as much as several years, which will push the total interest amount up even further.

This extension may prevent an extreme financial crisis in the shorter term, but for households that were already squeezed by the pre-COVID economic slowdown and have been using savings to stay afloat during the pandemic, this may simply delay the inevitable deep financial hardship.

The banks were also at pains to make it clear that extensions on the initial six months will not be automatic and will only be made available to those still experiencing financial hardship, as decided on a case-by-case basis.

Any customer who can afford to start repaying their mortgage or loan will be expected to do so when their initial deferral period expires.

“Those who are able to repay their loans will resume doing so, which is in the best interests of those customers and allows support to be directed to those who need it,” Australian Banking Association (ABA) chief executive Anna Bligh said.

Commonwealth Bank CEO Matt Cormyn told The Australian the Victorian situation points up how precarious any recovery will be. “It (the Victorian situation) points to the difficulties and complexities of managing coronavirus, and how quickly things can turn and change. It’s too early to tell what the impact will be but clearly it’s a negative for the Victorian economy, and more broadly, given the size of the state.”

In some instances, banks are suggesting customers vary or restructure their loans instead of taking further repayment holidays. Varying a loan means making lower payments and extending the lifetime of the loan, while restructuring it would mean transitioning to an interest-only payment. Both these options will also increase the amount of interest paid in total on the loan.

The extension of the mortgage repayment holiday has been designed to avoid the “September cliff” – the period in which the initial six-month loan deferrals end in tandem with the end of the JobKeeper subsidy and the JobSeeker Coronavirus Supplement.

“This new phase of support turns a cliff into manageable steps for Australians to get back on track and repaying their home and business loans,” Ms Bligh said. “[It’s giving customers] the breathing space they need to work with their bank and get back on their feet financially.

“Australia’s banks supported their customers as the country entered the COVID-19 crisis and they are determined to support their customers on the way out of the crisis.”

Treasurer Josh Frydenberg supported the banks’ decision.

“If somebody’s lost their job and they’ve got a residential mortgage or indeed if their business has been closed and they’ve got a commercial loan, then they would be cases where the customer would need to talk to their bank, and I understand it that the bank is going to be very supportive of their customers,” he said.

Customers who are still seriously financially impacted at the end of their deferral will be referred to their bank’s hardship arm to discuss long-term help and solutions for their situation.

More than 800,000 customers have deferred repayments during the pandemic so far, and the Big Four banks have confirmed that many have already started making payments again.