Finance Market Update – 17 July 20
Nearly two hundred and fifty billion dollars in loans had repayment holidays. In this update we talk about why that is a bad thing and why so many people are refinancing and changing banks.
One of the primary crutches people had access to as the virus crisis took hold was to defer half a year of repayments on their mortgage or business loans.
For context, so far there are around 485,000 mortgage holders and 216,000 business customers who took the repayment holiday for up to six months. That is 18% of all small business loans for $56 Billion and a whopping $192 Billion in mortgages.
A total of $248 Billion.
The timing of the current deferrals and repayment holidays ends around the end of September, conjoining with the timing of the supposed end of Job Keeper, so people were referring to this as the “cliff” that when people had to start making repayments again or lose Job Keeper would see defaults on loans and businesses closing down skyrocket.
As I said in the last update there will be no cliff.
The government has not announced a replacement scheme for JobKeeper but there will be more income support made available.
This is of course welcome for those businesses and people who need it, particularly in industries that were shut down by the government over health concerns, like hospitality for example, and who for no fault of their own might have lost their livelihoods.
Indeed, the banking regulator APRA has come out and said that they will not penalise banks for continuing deferrals until the end of March 2021. This means that mortgage holders and small business owners who have deferred repayments could extend the total time without making a payment to a total of ten months, up from six.
Banks also put away billions in their provisions for losses on deferred loans but in a positive sign around 1 in 5 or so are starting to make payments before the full half year holiday is over.
Banks will work with people to continue the support if they need it. It will unlikely be as easy as it was in March when the virus crisis was starting to pause the repayments and lenders will assess each situation on a case by case basis, but the extended support will be there. As it should be.
This will surely be welcome by many people who need the cash flow support, but it is important to remember that the deferral period does not come cheap.
The interest and costs of the loans just roll up into the balance of the loan owing meaning after the deferral period the loan size is greater than at the start, which also means subsequent repayments are higher as well as there is more debt to pay off. You could end up paying interest on interest.
There are concerns over the extended financial support.
For one thing there are probably quite a number of micro and small businesses that are technically still alive and solvent because they are on JobKeeper and when that ends so too might their business.
This means when the government money runs out, which it will probably happen early next year, there are a lot of businesses that will close up for good.
This is incredibly sad, especially when the business closed it doors for the first time because of the virus and another time because they lost support.
Another concern is for businesses who will survive but have a tarnished record.
Back in March the newspapers, government and everyone was saying the entire country is going into a half year shut down hibernation, that one in five people could get infected, our hospitals will be overrun, people will die and you need to go into lockdown and isolation.
It was a scary time.
The government and banks got together and came up with this deferral of repayments plan for the six months which was a great idea and one that would have probably been highly successful if the situation got as bad as people thought it would.
But the situation in Australia never got that bad.
People were scared and were told to defer their repayments and so we ended up with a quarter of a trillion in loans with deferred repayments.
One of the biggest repercussions from the deferrals is that most people who deferred their repayments and now apply for a loan will get declined.
This consequence was severely underrepresented and unknown to most people.
Banks and lenders now view those people who deferred their repayments as a higher credit risk or in a sort of default on their existing loans. This is not an accurate view in many cases.
People were being prudent and planning for a half year apocalypse which never eventuated and now when they want to borrow money to grow their business or get back up and running they are being declined because of they did what they thought was needed.
A good business has a good plan and planning ahead should not be punished.
Over the next few months and even years the fallout from the technicality of loan deferrals could be the nail in the coffin for many businesses who in normal circumstances would have got a loan approved which might have helped them survive.
Imagine surviving the virus only to die from taking a (repayment) holiday.
Over the past few months, the value and sheer number of people refinancing their mortgages and switching banks has beaten historical records.
This is not really surprising given we have lowest interest rates on record (one of the forces fighting for a property price boom) and that many people have lost income and trying to reduce costs.
There are also very attractive low fixed interest rates being advertised which is making people think about their current rate and trying to get a lower rate.
Fortunately Skyward Financial offers free home loan reviews to see what options are out there to save money, consolidate debt or free up equity for investments, so if you or someone you know has questions about refinancing Let’s Talk.
According to the Australian Bureau of Statistics in May 64% of people who refinanced their mortgage in May 2020 also switched lenders.
This stat adds up. Back in an update in February we talked about how there is a huge cost for loyalty with banks who prioritise lower rates for new customers while keeping the average rate higher for existing customers, so it makes sense to look at new lenders and banks that will give you a better rate.
But remember it is not always about rate. Consider the features like an offset account if you need cash out to renovate or for a new purchase or investment and if you want to fix a rate or have the flexibility of a variable rate. There are a lot of things to consider and just going for the lowest rate without wider considerations does not make sense.
As we head into the future ‘Open Banking’ will make switching banks even easier.
We talked about open banking in the last update and one of the key functions it will enable for people is the ability to switch banks much faster and easier.
The reason it will be faster and easier is that the banks can just send your data to each other as part of the application which helps them with analysis and saves time in you or your broker collecting all the info manually.
The technology is available now and will become more mainstream over the next few years which will mean switching banks becomes the new normal.