‘The clock is ticking’: what will happen when Australia’s mortgage freeze ends?

Nearly 500,000 Australians whose livelihoods have been hit by Covid-19 could face a ‘financial cliff’ when payment pause ends, analysts say

mortgage freeze - salt financeKristina Carson knows it’s not a get out of jail free card. But with nearly 500,000 others, the Brisbane cafe owner needed help from her bank when the coronavirus pandemic devastated her business.

Australia’s banks have given six months’ grace to thousands of customers like Carson under their mortgage deferral scheme, which with the government’s jobkeeper program has enabled households to keep afloat since the pandemic took hold in March.

“When the opportunity came up to defer loan payments it was really a necessity for me to do that,” Carson says. “I’ve got a 14-month-old son and another on the way in August so we had to make sure that we could keep a roof over our heads and it’s been a big help.”

The big question now is what happens when the scheme runs out in September – because it is clear that the economic slump induced by the crisis has some way to run.

The Australian treasurer, Josh Frydenberg, has already admitted the country is in recession without even waiting for the official confirmation. The latest unemployment figures released this week showed that the jobless rate is 7.1% and most economists believe it will reach double figures in the coming months.

It is a fast-moving situation, and while Australia’s efforts to stop the spread of the disease have boosted confidence, the banks know that many people will not be going back to their pre-Covid income any time soon. With that in mind, they have started talking to their customers to assess whether they will need more help after September.

For people like Carson, who has home and business loans totalling more than $500,000 with NAB, it is not clear what will happen, although she expects some negotiations with her bank.

Salt Finance - mortgage freeze“The payment deferral finishes after six months so then we have no idea what the future will hold,” she says. “We will reassess with them and see what they can offer.

“We know this scheme is not a get out of jail free card and the interest has to be paid.”

According to an NAB spokesperson, the bank is now speaking to its customers “to check-in, see how they are doing and understand where we can help”.

Carson has a newsagency in Brisbane’s CBD and opened a cafe, Más Espresso, last March. Together they employ 17 people. Both businesses depend on foot traffic and, while she says many offices have reopened in recent weeks, they cannot accommodate all their workers because of the government’s distancing rules.

“Even if they all come back there might only be 30% occupancy so we’re looking at a city of only 30% capacity,” she says. “We rely on foot traffic so it’s a long-term thing. We’ll have to think about staffing levels and what we order from suppliers.”

The looming economic cliff edge is causing alarm throughout the country, including at Sydney’s Martin Place, where the Reserve Bank’s experts have been preparing for the worst.

Documents emerged this week revealing that the RBA considered advising the government to suspend real estate transactions during the pandemic in order to prevent the property market from going into meltdown. The RBA thinks that prices could fall 15% in the worst-case scenario.

The payment deferral scheme and jobkeeper have helped stave off those fears so far and the RBA believes that the big retail banks and government will manage the schemes so that the economy does not fall off a cliff.

The financial comparison website RateCity.com.au has warned that there is a hidden cost to the deferral scheme because homeowners’ payments would end up being higher. Someone with $400,000 owing on their mortgage who paused their repayments for six months would see their total balance rise to $407,203, meaning they will pay $62 a month more on their loan.

“In the long run, mortgage deferrals come at a huge cost,” says RateCity research director Sally Tindall. “Banks continue to charge their customers interest even when the loan is paused. This is something many people we’ve spoken to were not aware of.

“The bigger issue is what happens at the end of the six-month pause if someone still can’t make their mortgage repayments. The clock is ticking for these customers who haven’t been able to regain employment and probably feel like they’re on borrowed time.”

In addition, mortgage stress is on the rise, with 37.5% of homeowners under pressure as opposed to 32% before the crisis, according to research by Martin North at Digital Finance Analytics. He says the bank and government support schemes have helped soften the blow on many people who lost incomes in the initial phase of the crisis, but he has detected increasing stress on more professions.

“We’re starting to see pressure on more upmarket jobs. It started with young people in lower income jobs, gig jobs, but now it is more stable jobs,” he says. “If the September cliff emerges then it will heap pressure on firms to reduce staff numbers. Unemployment might remain high for a long time.”

He anticipates that the banks and government will do whatever it takes to keep people solvent and avoid the potential disaster of thousands of homeowners being forced to sell their properties because they cannot keep up with payments.

Salt Finance - mortgage broker“The question is what will banks do?” North says. “They are not in any hurry to foreclose on people because that means they have to declare bad loans and that means they have to hold more capital. So they will try to do anything they can to allow people to keep their homes – they will prefer that to foreclosure because that is just cutting off their nose to spite their face such as is the scale of their investment in the housing market.”

At the sharp end, Carson is hoping that the banks will do just that as she tries to keep on an even keel in the storm.

“It makes it bit easier knowing that we’re going through this with everyone else,” she says. “But not knowing how long it’s going to go on makes it harder. So I hope the banks will be understanding and supportive. Only time will tell what they will require from us.”

 

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New-homebuyers could be given $50,000 handout under Property Council of Australia’s bold plan

New homebuyers could be given a $50,000 handout under a proposal by the Property Council of Australia.

It says the move would “kickstart construction for new housing, generate jobs and boost consumer confidence”.

PCA proposal home owners - salt finance

Axing stamp duty and an immigration push are also among the measures being proposed in a seven-point plan to resuscitate the country’s ailing housing market.

The industry warns it’s a vital move, with construction halving and half a million jobs at risk.

Ken Morrison from the Property Council told 7NEWS that 900,000 Australians are currently employed in the construction sector.

“Some big and bold thinking is required to get the Australian economy going again after the impact of the COVID-19 pandemic,” he said.

“If this sector winds down, it’s bad for everybody.”

The Property Council’s plan

  • Buyers of newly built homes would get a $50,000 ‘New Home Boost’ from the federal government;
  • Broad-based tax reforms including the axing of state Stamp Duty taxes;
  • The GST widened in the medium term to include fresh food, health, and education;
  • And a “Welcome to Australia” immigration campaign to drive growth

The industry predicts another 400,000 jobs could go by years end, adding to the 100,000 already lost.

Graham Wolfe from Housing Industry Association says it’s a “very important” move.

“We are at a very, very critical stage right now,” he said.

Taxes and charges currently account for up to 50 per cent of a new home’s cost.

New home sales have also fallen 23 per cent since the lockdown began.

On top of that, a third of current projects have been cancelled.

The lead time for these types of constructions is six to nine months, which means home builders will likely face a harder climb back.

The Federal Government says it’s supporting the sector through Jobkeeper and wage subsidies and is monitoring developments.

For the council’s full proposal, click here.

 

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RBA rate cut: Reserve Bank interest rates held at 0.25 per cent

The Reserve Bank has kept Australia’s official cash rate at the historic low of 0.25 per cent, with experts predicting it will remain at that level “for some time”.

At its April meeting this afternoon, the RBA voted to keep interest rates on hold just weeks after it was cut from 0.5 per cent to 0.25 per cent during an unscheduled meeting in mid-March as a result of the escalating coronavirus crisis.

It was the first time a rate cut has been announced outside a regular meeting since 1997, and is a glaring sign of just how severe the situation is becoming.

In a statement, Governor Philip Lowe said the Board had reaffirmed the targets for the cash rate and the yield on three-year Australian government bonds of 25 basis points, as well as the other elements of the package announced on March 19.

“The coronavirus remains first and foremost a very major public health issue, but it is also having very significant effects on economies and financial systems around the world,” he said.

“Many countries are expected to experience large economic contractions as a consequence of the public health response. Large increases in unemployment are also expected.

“Once the virus is contained, a recovery in the global economy is expected, with the recovery supported by both the large fiscal packages and the significant easing in monetary policy that has taken place.”

But he said there were “some signs that markets are working more effectively than they were a few weeks ago” which “partly reflects the substantial measures undertaken by central banks”.

“The co-ordinated monetary and fiscal response, together with complementary measures taken by Australia’s banks, will soften the expected contraction and help ensure that the economy is well placed to recover once the health crisis has passed and restrictions are removed,” he said.

“These various responses are providing considerable support to Australian households and businesses through what is a very difficult period. The Australian financial system is resilient. “It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy.”

He said the Board was committed to doing what it could to “support jobs, incomes and businesses” as Australia deals with the coronavirus.

“The comprehensive policy package announced last month will also support the expected recovery,” he said.

“The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

“The Board wishes the best to all Australians as our country deals with this very difficult situation.”

Most experts had predicted the cash rate would remain untouched today, as board members had already signalled it will likely remain lower bound at 0.25 per cent “for some time”.

“As such, the focus of RBA meetings will be on how the board assesses its QE measures and whether they may require adjusting,” Westpac said in a note on Monday.

CoreLogic’s Head of Research, Eliza Owen, said it was no surprise the RBA had left the cash rate on hold after an “extraordinary March period” in which the cash rate was reduced twice and unconventional monetary policy was introduced.

“The record-low rate of 0.25 per cent may be in place for years to come. No doubt the RBA will be closely monitoring the impact of record low interest rates and other stimulus measures on the economy,” she said.

“To date, the policy announcements from the RBA and other sectors of government have been well received with the overall level of stimulus now getting close to 17 per cent of Australian GDP.”

The RBA Shadow Board, based at The Australian National University, said it was “94 per cent confident that keeping the cash rate on hold is the right policy”.

It said the extraordinary events surrounding the COVID-19 pandemic were “certain to push Australia into recession” for the first time in 28 years, and that efforts by the government and the RBA to stem the economic downturn were “unprecedented”.

But Shadow Board member Dr Timo Henckel said it was tough to determine the impact of those efforts given how quickly the situation was unfolding.

“For example, while the latest official ABS figures show an unemployment rate in Australia of 5.1 per cent, this may well double within a couple of months due to the COVID-19 crisis,” he said.

“It is unclear to what extent the Government’s JobSeeker program will help workers remain attached to their employers.

“Looking ahead six months, the Shadow Board’s vote in favour of keeping the cash rate steady at 0.25 per cent is still very high – 88 per cent.”

Meanwhile, all 23 economists and experts surveyed in the Finder RBA Cash Rate Survey correctly predicted the RBA would hold the cash rate at 0.25 per cent today, after the board indicated it had no appetite to cut further.

RBA rate cut

John Rolfe of Elders Home Loans said not enough time has passed since the latest round of announcements.

“The recent financial support from the Federal and State Governments needs to flow through. The RBA needs to keep its powder dry in case this gets worse,” Mr Rolfe said.

Finder insights manager Graham Cooke said the unfolding coronavirus situation and its impact on the economy would likely have a huge impact on the Australian housing market.

“Many economists tell us they expect property price drops of 10 to 20 per cent,” he said.

“The biggest impact, however, is likely to be on sales volume. With auctioneers forced to allow only one-on-one home visits and virtual auctions, and with many Aussies losing their jobs, it is likely that the housing market will hit the breaks fairly quickly.

“Also, the announcement from banks that many homeowners will be allowed a repayment holiday means that the inevitable glut of homes due to hit the market may not do so all at once.

“The big question is – how long will this last, and how quickly can the market pick up after?

“For would-be first-time buyers with a deposit saved and a secure job – this could be a great opportunity for those who missed out on the property dips in 2019.”

 

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Banks to help commercial landlords who help tenants through COVID19

Australia’s banks will extend the six month deferral of loans, building on the ABA’s Small Business Relief Package, to 30,000 more businesses across the country. 

This support now extends to 98% of all businesses with a loan from an Australian bank.

covid19

 

Businesses with total business loan facilities of up to $10 million (up from the $3 million small business threshold) will now be able to defer repayments for loans attached to their business for six months. These businesses are generally much larger and employ a greater number of people.  

This extension of support will apply to an additional $100 billion of business loans. Combined with measures already announced, it will mean a six-month deferral of loan payments will apply to up to $250 billion worth of loans, with extra cash available to 425,000 businesses to cope with the crisis during the COVID-19 pandemic.  

During this period banks have also agreed to not enforce business loans for non-financial breaches of the loan contract (such as changes in valuations).  

The new measures will apply in all sectors of the economy, and on an opt-in basis, under the conditions that:  

  • For commercial property landlords, they provide an undertaking to the bank that for the period of the interest capitalisation, they will not terminate leases or evict current tenants for rent arrears as a result of COVID19 
  • the customer has advised that its business is affected by COVID-19  
  • the customer was current in terms of existing facilities 90 days prior to applying 
  • interest is capitalised – meaning either the term of the loan is extended or payments are increased after the deferral period. 

“This will help protect many more thousands of small businesses from being evicted if they are struggling to pay the rent as it covers approximately 90% of commercial property owners who have loans with an Australian bank.”   

ABA CEO Anna Bligh

Australian Banking Association CEO, Anna Bligh said “as this crisis has deepened and more businesses are affected we are building on the Small Business Relief package to ensure more businesses are given a lifeline to help them survive through the coronavirus pandemic ,” Ms Bligh said.  

“Banks are expanding their support to an extra 30,000 thousand businesses by raising the threshold of those who qualify for the six month deferral of loan repayments from $3 million to up to $10 million in total loan facilities.  

“The type of businesses this applies to includes commercial landlords of properties such as local shopping centres, pubs, clubs and restaurants, who must agree not to terminate leases or evict current tenants for rent arrears due to COVID19 in order to access support.  

“This will help protect many more thousands of small businesses from being evicted if they are struggling to pay the rent as it covers approximately 90% of commercial property owners who have loans with an Australian bank.   

“Where landlords within this threshold do the right thing by their tenants, banks will do the right thing by them. 

“When combined with the previous small business assistance announced just over a week ago, this means $250 billion worth of loans covered are able to access a six month deferral of payments, which means dollars staying in the pockets of businesses throughout this crisis,” Ms Bligh said.   

Businesses with total loans of more than $10 million may also be eligible for relief, but this will need to be considered on a case by case basis as they are often much more complex in their structure. 

Banks have developed this relief package following discussions with APRA and ASIC to provide the appropriate regulatory treatment. 

This measure is announced subject to authorisation from the ACCC. 

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COVID-19 Update: We’re here for you!

salt finance covid-19

 

What an extraordinary, challenging & difficult time this is for all of us right now coping with COVID-19.

The team at Salt Finance would like to take the opportunity to offer our sincerest and deepest support to everyone being affected by this horrendous virus.

There have been so many developments in the past few days regarding COVID-19 and things continue to change daily for all of us, our family, friends & colleagues.

From a lending and borrowing perspective, there have also been and there continues to be significant, positive change and action taken by lenders during this time.

Tomorrow, we will share what I believe are the most crucial updates for homeowners and business owners related to lending and what you can do. So please keep an eye out as it really does matter to all of us. Also, we’ll be announcing a great new initiative to make staying up to date even easier for you. Be sure not to miss that!

In the meantime, I would like to assure you that we are still here and working for you. We will not close, and we have no plans to close. 

So please get in touch if you have any urgent needs, so we can prioritise them.

Salt Finance Team