Banks may gouge struggling mortgage holders

According to APRA, repayments on $195 billion of mortgages had been deferred as at August, representing 11% of Australia’s total mortgage loan book.

With a significant chunk of these borrowers still experiencing financial stress, and likely to seek further relief from mortgage repayments, there are concerns that Australia’s banks may take the opportunity to jack-up mortgage rates:

Home buyers unable to resume normal repayments beyond the loan deferral deadline at the end of September may be forced to opt into higher interest-accruing loan products to avoid the possibility of losing their property while money is tight.

Banks are offering mortgage holders still feeling the financial pain of COVID-19 the option of moving to interest-only payments…

Commonwealth Bank, Westpac and NAB have all confirmed interest-only rates would be higher than what would be offered if a customer remained on principal plus interest repayments.

The move has sparked concern from RateCity research director Sally Tindall, who says banks should not hike interest rates for people who claim financial hardship because of the pandemic.

“Some of these people, through no fault of their own, have had their livelihood stripped from them,” she said…

“Asking people to pay more interest when they are in financial distress doesn’t seem fair or reasonable”…

“The banks have been told by ASIC to be fair and flexible in their negotiations, and to help people stay in their home if it’s in their best interests,” she said.

“They need genuine help from the banks, not a bigger interest bill”…

Across the major banks, principle and interest variable rates sit at around 2.7 to 2.8 per cent, while interest-only repayments sit at rate around 3.3 per cent.

To be fair, this is banking 101: the higher the risk, the higher the interest.

Lets face it, if you were the lender you would expect a higher return on risker deals.

The added interest bill is also negligible and obviously a better option for many than losing their homes.

The greater concern is mortgage holders falling into negative equity if property prices fall when paying interest only. But that is tomorrow’s problem.

Moreover, what will happen six months down the road when the current batch of mortgage deferral extensions expire? Will the banks and ASIC extend and pretend once again and gift more deferrals? Or will struggling mortgage holders be forced to face the reality that they can not afford repayments and must sell?

If/when that point arrives, things will get very interesting for Australia’s property market. That’s when we could see a literal tidal wave of forced sales.

Unconventional Economist
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  1. More gaming the system. Can’t afford to pay your mortgage? That’s ok we’ll just move you to interest only to keep the house price party going.

    It’s always in 6, 12, 18 months time! House prices in Australia will never be allowed to drop.

    • Jumping jack flash

      Its what they don’t say that is important.

      Consider that once the principal of a mortgage is repaid, the bank stops earning interest from it.
      Interest is how banks earn their money. This is why they hardly ever speak of interest, it is their secret shame, but absolutely essential.

      How nice of them to delay repaying the principal, and graciously allowing their debt slaves to just repay the interest, but adding a little bit more on top, because, you know. Those banks are just so nice. They’ve really got their customers’ and the nation’s needs in mind.

      After all, the total monthly payment from said debt slaves would certainly be less in these troubling times, so everything is good. Right?

      • Regardless it is just another sleight of hand to keep prices forever high in this corrupt country. Really they are just turning 30 year mortgages into 40 (or more??) year mortgages without actually coming out and saying it.
        I’ve given up hope on the bubble ever bursting. Just like we are seeing here with shifting people on to IO, regardless of how big the bear is here, the government, rba, banks will keep prices up.

      • The ultimate subscription model! You can’t just stop/cancel the roof over your head (yeah yeah, I know people can sell/rent but that’s not the point)

      • @JJF

        You have missed another very subtle point, methinks.. South Parks gnomes would be proud!

        Phase 1: 6 months of deferred mortgage payments get added to the overall principal balance
        Phase 2: P&I mortgage gets converted to a higher rate IO mortgage on a higher principle balance
        Phase 3: Profit!

        Nice work if you can get it.

  2. ““Asking people to pay more interest when they are in financial distress doesn’t seem fair or reasonable”…
    My bank shares are down at least 40% lady!
    Seems fair and reasonable from my side of the table; they aint a charity!

  3. Green shoots everywhere according to CoreLogic except for Hellbourne. The big news, though, is annual increment at the 5 city level has dropped below 6%. Someone think of the Agents!

  4. happy valleyMEMBER

    “Lets face it, if you were the lender you would expect a higher return on risker deals.”

    And let’s face it, if you were a depositor you would expect a higher return for the enormous risk you are and have been taking over the last 6 years, as the RBA happy clappies and their private bankster mates have r.ped depositors. Oh what a feeling?

  5. Now, I ain’t sayin’ they be gold diggers,
    (When I’m in need) But they do seem to be messin’ with broke n.i.n.j.a.s

  6. Sheep get shorn.

    If you can’t afford the interest rate on the I/O, and are such a bad credit you can’t get refinanced then there is still an option – SELL!

  7. Someone ElseMEMBER

    A literal tidal wave?! Wow, real estate has gone tectonic.

    Mixed metaphors in Melbourne, tidal waves in real estate (maybe just Wamberal)…the whimsical linguist in me loves it!

    • As someone very fond of the proper use of our language, I’m with you on this one. However, be careful where, who and how you criticize on this site. Despite the common use of profanities and name-calling of all kinds here, the natives are extremely sensitive to any correction to their grammar or general expression. For example, should you ever consider clarifying someone’s confusion with “less” and “fewer”, be prepared for the ensuing barrage of abuse. 😉

      • Someone ElseMEMBER

        Don’t get me wrong, I’m not correcting, I genuinely like it. It’s fun.

        I’m pretentious, not a pedant. I’m firmly in the camp of dynamic, evolving english.

        Mixing things up is great fun. Latin-style double negatives! Y’all and youse! Any of that new-fangled yoof-speak!

        Anyone for a redundant tautology?

        (And writing in pseudo dot points?)

          • What has amazed me on more than one occasion is the lack of proofreading undertaken before big, expensive advertising campaigns hit the public view. I’ve seen the less/fewer error on television adverts and on the sides of buses perpetrated by big four banks and by insurance companies, yet it’s so simple. Another example: there was less traffic on the road/there were fewer cars on the road. Not the other way around.

            Sometimes, finding the right answer is like looking for a haydle in a neestack. You can borrow that one – just throw it into the conversation somewhere and people will know what you mean but really have to stop and think “Did I hear that right or what?”
            Life is just a chowl of berries and it’s said dimple to thugger bings up. Make it from tea! 😁

        • An exercise in vowels
          Theophilus Thistler the thistle sifter,
          In sifting a sieveful of unsifted thistles thrust three thousand
          Thistles through the thick of his thumb.

          Robert Rowley rolled a round a rolled round,
          And if Robert Rowley rolled a round a rolled round,
          Where is the round roll Robert Rowley rolled round?

          Dividing and gliding and sliding,
          And falling and brawling and sprawling,
          And driving and riving
          And striving.

          Hardly had his hale highness heard the easy hedgehog,
          When he hit the humming-bee by the
          Hunter, who had horrible beetles in the human hall.
          I love to hear the horses hard iron hooves, go
          Hammer, hammer hammer, hammer hammer, on the easy highway.
          I hit my horse hard and hurried
          Him out to hunt up hogs.

  8. Jumping jack flash

    “Banks are offering mortgage holders still feeling the financial pain of COVID-19 the option of moving to interest-only payments…”

    The banks would looove this. A nice opportunity to turn a standard P&I mortgage into an infinite income stream, and then turn up the interest to boot! Its never been a better time to be a bank.

    “To be fair, this is banking 101: the higher the risk, the higher the interest.”

    Yes, you would think so, wouldn’t you?
    We must have the most stable and risk-free economy in the history of time, with the interest rates so low, and never to move upwards again. (at least, not intentionally)

    Well I suppose if you ignore all the risk except the one metric that is improved by the expansion of debt, then I guess there’s no risk. None at all. Let the debt flow. The risk takes care of itself.

  9. If they’re neither paying interest nor principal why would it be incorrect? If a borrower switches to interest only then then the higher rate is acceptable?

  10. As it was foretold, banks might be evil but they sure aren’t stupid… either refi away to a better deal (read take your [email protected] off their books) or go to the knackers via the dairy…

    • Jumping jack flash


      If you’ve bitten off more than you can chew there’s only a couple of realistic options.
      All of this other guff is the banks extracting the last ounce of essence from the dead and dying carcases of their debt slaves. It certainly isn’t because the banks are being nice or anything.

  11. “Australia’s banks may take the opportunity to jack-up mortgage rates”
    That’s not exactly true is it, they aren’t jacking it up on existing P&I or IO, the move of a customer from one to another is causing a higher overall interest bill.
    It is the same mortgage rates, just moving them to the IO option that already had the higher rate….

    • Exactly. IO rates have been higher than P&I since at least the beginning of 2017. There is nothing new here (unless they are proposing to further increase the gap).

  12. Some anecdata from Perth; a friend just sold their house after trading up for family reasons. At a meeting this week, the agent quietly mentioned that they were lucky to have made it to settlement. All month he’s had deals fall through. Some due to offers being withdrawn, and others from failure to get finance. He’s now seeing a run of listings from forced bank sales – “lots of people going bust all at once”.

    “How did you go bankrupt?” Bill asked.
    “Two ways,” Mike said. “Gradually and then suddenly.”
    – Hemingway, The Sun Also Rises.

  13. Why aren’t we exploring a debt jubilee? This is madness – meandering along between debt restructuring / deferment / extend and pretend / or trying to sell the place to buyers who would sensibly hold off. Just give everyone (including savers) money and then restructure the loan. The last thing we need is mass evictions regardless of where you sit in this debate. The social problems would be awful (think getting stabbed outside your local Woolies) let alone the financial carnage – banks going under / then the super funds then even more unemployment and a negative feedback loop.I agree we never should have painted ourselves into this corner but that’s where we are and we need to be pragmatic about the solution.

    • Does the pragmatism extend all the way to ensuring the house prices stay high? What’s pragmatic about that in a world of higher unemployment?