Banks not sharing the pain with mortgage ‘holidays’

New home owners will pay tens of thousands of dollars more on their mortgage if they accept a six-month mortgage 'holiday' option. That’s money going to the banks. But should lender and borrower be sharing the pain?

There’s always a nagging worry about holidays. They are fun while they last, but at the same time work piles up, chores pile up, debts pile up.

Mortgage holidays are a bit the same. They sound like a good thing - a break from paying the mortgage when times are tough. But behind the scenes, they can be super-expensive for home owners.

The latest Government-sponsored mortgage holiday package announced in response to Covid-19 is no exception.

New figures prepared for Newsroom by bank research and ratings company Canstar show home buyers with new mortgages will end up paying tens of thousands of dollars in extra interest payments to their banks if they take up the offer

That’s because the holidays aren’t a holiday at all. Just a deferral of the payment. All the time borrowers aren’t paying, interest payments are stacking up.

The table below shows how a home owner could end up paying an extra $26,665 on a $500,000 mortgage with 24 years left to run, if they took up the six-month holiday option. That’s more than 11 percent more than they would have paid without the holiday.

With a $750,000 mortgage it would be almost $40,000.

For home owners who were 10 years into a 25-year mortgage, the holiday would still cost them an extra $15,400 and $23,100 in interest payments respectively on a $500,000 or a $750,000 mortgage.

That’s a lot for each home owner, and it’s potentially billions of dollars for the banks.

The mortgage repayment holiday scheme was announced by Finance Minister Grant Robertson as a way of providing a safety net to home owners who lost their job, had their business frozen by the lockdown, or found themselves on reduced hours at work because of the Covid-19 pandemic.

The deal was nutted out between the Government, the Reserve Bank, and New Zealand's retail banks, Robertson said. 

“We've worked really hard with the banks on this over the last few days and I thank them for their work,” Robertson told RNZ’s Checkpoint programme.

But the Canstar figures show major financial downsides for mortgage holders, who will end up paying significantly more to their banks.

Canstar New Zealand general manager Jose George says the extra costs can be reduced if home owners switch to an interest-only mortgage (paying the interest but not the principal), or if they increase their mortgage payments after the holiday.

But people should look carefully at whether there were other options than a mortgage holiday, he said.

“We know these times are extraordinarily difficult for many families, and taking a mortgage holiday may seem an obvious choice to ease financial hardship,” George told Newsroom. “But do consider all ways of easing any financial strain, alongside taking a mortgage holiday.” 

"Enhancing bank profits"

Sam Stubbs, founder of KiwiSaver provider Simplicity, and a long-time critic of the banks, goes further. 

His team has also run the numbers.

“Calling it a 'payment holiday' is, in my opinion, misrepresenting the situation. It’s not a holiday, it's a deferral, and one that will cost someone with a $500,000 mortgage something between $51-73 a month extra for the life of their loan. For a 20 year, $500,000 mortgage, paying 4 percent interest, it's over $15,000 extra over the life of the loan. 

“That’s $15,000 more revenue for the bank, $15,000 less for the homeowner.”

The cream on the cake for them is they make more money.

Stubbs argues the four big Australian-owned banks - which jointly made $5 billion profits last year - are taking no direct pain from the mortgage holidays. 

“In fact, they are enhancing their long term profits in a manner that helps make sure people don’t default on their mortgages. This prevents personal distress, which is a good thing. But don’t think the banks are doing it for that reason. 

“What this does for the banks is prevent the expensive and time consuming process of mortgagee sales, which would stress their whole loan book. And the cream on the cake for them is they make more money.”

ANZ’s external communications manager Siobhan Enright says it’s important to look at the wider picture of what banks are doing to help customers, not just loan deferrals. 

“We have cut our home loan rates, credit card rates, personal loans and overdraft rates, reduced commercial business and agri loans and overdraft base rates, extended overdraft facilities, and waived fees for contactless debit transactions, international funds transfers and business credit cards to name a few,” she says.

BNZ’s Sam Durbin says the situation is moving fast. 

“We’ve worked with government and regulators to develop a range of measures to support personal and business customers over the past two weeks and right now our focus is on processing applications and working with our customers to take advantage of those measures,” he says.

By the beginning of the week, BNZ had received more than 8000 applications for assistance with home loans, Durbin said; Enright said ANZ had received around 11,500 call back requests. 

Sharing the pain

There’s an argument that banks, as big, profitable companies, have a moral, if not a commercial, imperative to share the pain of their customers. 

There’s a similar discussion going on about whether big commercial landlords should be offering SME tenants rent reductions during the lockdown, even if they don’t legally have to, as a way of keeping them afloat in these unprecedented times.

It’s a win-win, some lawyers and advisors are arguing, because if landlords push their tenants too hard for rent they can’t afford to pay, they may end up with no tenants at all.

In the case of the banks, customers are asking if banks couldn’t offer a mortgage payment-free period; a true mortgage holiday, where interest payments don’t mount up. That would help ease financial pressures for home owners, but also could prevent customers defaulting.

Other industry commentators dismiss this idea as unworkable, even dangerous.

Banks are going to have to write off a fair whack of money and their profits are going to get hammered.

John Bolton is a former banker and now chief executive of mortgage broker Squirrel. He says mortgage payment deferrals are a lifesaver for some of  his customers and banks are going to take many financial hits in the coming months and years.

“I don’t agree this is a money-spinner for banks,” Bolton says “They are going to have to face a significant increase in loan defaults, in arrears, and in insolvency. They are going to have to write off a fair whack of money and their profits are going to get hammered.”

The amount of money banks could make out of the mortgage holiday looks big, but the risks are bigger," he says. 

“If 20 percent [of people with mortgages] went onto a repayment holiday for 6 months, there would be about $4 billion of interest added to the debt Kiwis owe. But that’s in the context of a residential mortgage market that’s worth $280 billion.”

Bolton says repayment holidays are a big credit risk for banks because in normal times banks use payment - or more particularly non-payment - as a barometer of the health of a loan. A payment holiday means banks lose that monthly window to see how their customers are doing financially. 

“Banks will not be thinking ‘This is a great opportunity to make extra money’. They will be thinking ‘This is how we help New Zealanders through a crisis. This is going to cause us grief, and we will have to deal with the consequences at the end of this. But the opportunity to do that is awesome, because the alternative is people are going into financial stress over the next two months.’”

This is going to be bigger than any of the banks thought it would be.

David Chaston, publisher of finance and business website, agrees with Bolton that banks are going to suffer plenty of pain over the next few months, even years. 

“I think there will be a whole lot of hurt for the banks. A lot of people are not going to make payments and loans are going to go bad, and that will show distress to the banks’ books and they will have to provide for that,” Chaston says.

“It’s going to be bigger than any of them thought it would be.”

Debt ratings agency Fitch earlier this week downgraded our banks’ credit ratings, and the other ratings agencies are expected to follow suit. 

Chaston says the situation for banks is very different to that for commercial landlords, because banks have much higher debt levels, so they would have less resilience if significant numbers of home owners defaulted on their loans.

“I’ve been banging on for a long time about how the banks are undercapitalised; how banks are highly leveraged.” 

He says there would be a risk for banks if the Government “co-opts them into being a social agency” - by giving true mortgage holidays for example. 

“We have to be careful,” Chaston says. “We don’t want to tip the whole thing over.

"Grant Robertson will be thinking about how to get banks to carry more of the load without toppling them over.”

Doing God’s work

Meanwhile a telling article this week by British author and banking commentator Philip Augar has urged banks to “put public interest above self-interest” or risk remaining “a pariah industry”. The number one thing banks need to do is “accept more risk and less profit from lending”, Augar wrote in the Financial Times (behind paywall) on Monday. 

Referring to Goldman Sachs chief executive Lloyd Blankfein’s claim during the 2008 financial crisis that bankers do 'God's work', Augar called on banks to make major changes to their culture and practices.

“These are big asks of a sector that prefers to buy rather than give goodwill. It will require turning on its head a me-first culture. But it’s the right thing to do. It would also finally allow this most important of sectors to legitimately claim to be doing God’s work — whoever or whatever their god might be.”

Stubbs isn’t convinced New Zealand banks are doing God’s work here - not yet at least.

"The banks are spinning the PR on this as if they are doing everyone a favour," Stubbs says. They have to do it, because the alternative is a grim world of mortgagees sales. And the silver lining for them is in doing so, they will actually make more money.

“Remember, the Reserve Bank has relaxed capital requirements for 12 months, and the Government is underwriting 80 percent of the risk on business loans. Those are windfalls for them too.

“I may have missed something, but I've yet to see an action by any major bank that involves them acting in a way which will reduce their profits to make Kiwis better off.”  

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