Mortgage pain is set to get worse. Here’s how banks are getting ready for it
By Clancy Yeates and Millie Muroi
As interest rates have climbed steeply over the past 15 months, banks have quietly braced for an increase in customer distress.
They have expanded their hardship teams that experienced a surge in activity during the pandemic, crunched data to find vulnerable borrowers, and contacted people coming off rock-bottom fixed rates.
Banks ave vowed to support customers, as they prepare for a likely increase in hardship cases caused by higher interest rates and a weaker economy.Credit: Marija Ercegovac
This has all been done to prepare for what banks see as inevitable: an increase in the number of people struggling with repayments.
The Reserve Bank gave borrowers welcome news this week when it left the cash rate on hold at 4.1 per cent for the second month running, and some are hopeful rates how now peaked.
Even so, some increase in customer pain still looks likely. This is partly because the number of customers missing repayments has been unusually low in recent times. But it’s also because the economy is expected to slow in months ahead, at the same time as past rate rises work their way into customer accounts.
For borrowers who are struggling, Treasurer Jim Chalmers’ this week repeated what bank executives have been saying for the past year: talk to your bank.
“The advice that I have for customers is if you think that you will be in trouble because of changes in your loan, whether it’s coming off a fixed rate or whether it’s the impact of these rate rises, the best thing to do is to engage with your bank as soon as possible,” Chalmers said on ABC radio.
Chalmers said he had spoken with bank bosses about the challenge of rising mortgage rates, and that each lender had ways of providing support. The resilience of Australia’s mortgaged households will remain in the spotlight when the country’s biggest lender Commonwealth Bank delivers its full-year results next Wednesday.
So, what exactly can banks do to help customers who are struggling? How much mortgage stress have banks registered so far, and how big a problem could it raise for bank investors?
When COVID-19 slammed into the economy in 2020, Australia’s banks played a key role by absorbing some of the huge financial shock. They allowed many borrowers to temporarily stop making their mortgage payments for up to six months.
Banks will use customer data to monitor for people who might be struggling and talk to them early.Credit: Dominic Lorrimer
These mass mortgage deferral schemes were a lifeline for hundreds of thousands of people including homeowners and small business owners. At the peak, more than $250 billion in loans had been put on hold.
This extraordinary support came alongside government stimulus such as wage subsidies and near-zero interest rates, while the banking regulator also gave banks capital relief to defer loans en masse.
This time, however, things are likely to be different. Banks have made it clear they will support customers who are struggling, but they are not planning to launch mass loan-deferral schemes. Instead, banks are combing through data to detect at-risk customers and trying to talk to people early about their options.
Rather than mass deferrals, analysts believe banks are more likely to allow people to extend the terms of their loans, which results in lower repayments, or in some cases switch to interest-only repayments.
E&P analyst Azib Khan says loan deferrals can help when there is a temporary problem, such as the pandemic, which meant many people couldn’t work. But deferring repayments is probably less relevant to the current situation, characterised by high interest rates and inflation. Instead, he says many struggling households will need to look at their budgets.
“Obviously, with most households, the last thing they want to do is default on their mortgage. So you either sell your property while you can and think about other options, or you cut back on discretionary spending and make sure you’re servicing your mortgage,” he says.
Khan believes banks will seek to avoid large numbers of foreclosures because of the negative publicity and scrutiny from government this would likely spark. Instead, he says banks will use customer data to monitor for people who might be struggling, and talk to them early. “What the banks want to do is be proactive,” he says.
NAB personal banking executive Krissie Jones says the bank has been contacting customers, including 570,000 in June, of which they found only 14 home loan holders needed a referral to its financial hardship service. “Technology and data have definitely helped us to be able to identify whether there’s a change in the way customers are spending their money or if there might be signs of financial stress,” she says.
Jones says the NAB Assist team, which helps customers get back on their feet, can offer different types of support depending on the circumstances. “The options they can offer to customers include temporarily pausing or reducing payments, restructuring loans, and there are times when we will refer a customer through to a financial counsellor as well as offer additional counselling support,” she says.
There is no denying many households are feeling the pinch from the rapid rise in interest rates: retail spending has weakened along with consumer confidence and other survey data.
A Roy Morgan survey last month found 28.7 per cent of people with a mortgage were at risk of mortgage stress, the highest since 2008. The pollster classifies households as being at risk of mortgage stress if they are putting between 25 per cent and 45 per cent of their after-tax income into their mortgage, depending on their income and spending.
But the number of people falling behind on their mortgage repayments has not yet taken off dramatically.
S&P Global Ratings structural finance director Erin Kitson says the percentage of customers who are more than 30 days behind on their mortgage payments has crept up over the last six to seven months to about 1 per cent in May, but that the figure remains around the long-term average.
“It’s still well below GFC peaks where we saw arrears reach around 1.8 per cent,” she says. “Unemployment now is quite low by historical standards so that is certainly helping to keep mortgage arrears around long-term averages.”
However, Kitson expects an uptick in arrears over the next year.
“We are expecting arrears to continue to rise given that they’re a lagging indicator,” she says. “Earlier arrears can take three to four months to appear after an interest rate rise is put through on a borrower level, but we’re expecting to see arrears reach their peaks around the end of the first half of next year.”
NAB’s Jones says while most of the bank’s customers are in “really good shape”, the bank has seen some indications of financial stress including a slight lift in the number of incoming calls. “We’re receiving about 1000 calls a day, and we’re seeing people making adjustments to the way they spend their money,” she says. “In fact, now, more than 40 per cent of our customers are running a household budget for the first time in their life.”
The resilience of the household sector in the face of rapid interest rate rises has surprised economists, with borrowers shielded by record low unemployment – which bankers see as the most important economic indicator for their mortgage portfolios. Refinancing – where customers dump their bank for a rival – has also given many customers a way to cut their repayments.
For bank investors, the prospect of a rise in bad debts among households and businesses remains a key risk. But much will depend on the economy, and whether Australia is able to pull off a “soft landing” in the battle to tame inflation.
When the country’s bank bosses appeared before a parliamentary hearing last month, they said delinquency rates remained low but that pressure on some households was growing due to the slowing economy.
Kitson says the unemployment rate and the level of refinancing activity would be key influences on what happens to mortgage arrears from here.
“I think any slowdown in refinancing activity might put some further pressure there on arrears, but unemployment is still by far and away the most important factor,” she says.
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