Banks look to jump-start economy while dealing with COVID-19

Banks look to jump-start economy while dealing with COVID-19

Chief executives of NAB and Westpac offered some insight into the economic casualties of the COVID-19 pandemic and a recovery path forward in their responses to a parliamentary committee today.

They warned the country would have to navigate falling house prices, high unemployment, a shrinking economy and a pandemic.

A five step plan: NAB

NAB’s chief executive opened with a five step plan recommended to orient the country towards an economic recovery, while cautioning it would have to be instituted with safety as the priority. 

“For a sustainable recovery, it is important that we make a gradual shift from support to stimulus,” Ross McEwan, chief executive of NAB, said to the House of Representative committee members.

“… This will come from a nationally agreed approach to reopening the domestic economy and getting our borders open -- and keeping them open. 

“Without this certainty we risk wasting the support provided so far and further crushing business confidence.”

NAB’s five step plan: CEO

  1. Bring forward already-legislated tax cuts in the Budget to help get cash back in the hands of households and businesses.
  2. Accelerate infrastructure spending in both construction and digital projects to help create jobs.
  3. Streamline approvals for residential construction and provide consistent rules and regulations across states to help speed up growth.
  4. Cut red tape for small businesses, which could make it easier for them to employ and pay people.
  5. Plan for the return of skilled migration and international students as they are “critical” for growth.

The cost of COVID-19

The banks painted a grim state of affairs: house prices were forecast to drop by double digit percentages, high unemployment would linger and the climb out of a recession would take time.

But most people had been spared the brunt of the financial pain due to the “vital” government and banking emergency measures, NAB said, adding the worst of the recession could be felt next year if stimulus payments and mortgage holidays taper away too soon.

“... We certainly think (the brunt of the recession) will be coming through next year,” Mr McEwan said.

“We are seeing great support from the government, a lot of heavy lifting from banks with deferrals, landlords offering some help with rental (relief) …

“If there’s no stimulation (people will struggle financially in the recession) … The shock absorbers of all that effort has been helping.”

A property crunch of 10 per cent or more: banks

Homes are expected to go down in value by double digit percentages next year, both chief executives said, particularly those in capital cities. 

“What we’ve modelled is from the start of the crisis, from April, (are drops) in the 10 per cent range,” Peter King said, chief executive of Westpac. 

“We’ve probably got 3 per cent of that so far.”

Low interest rates -- influenced by a historically low cash rate -- will help people service the loans, Mr King said, thousands of which are expected to resume mortgage repayments in September and October. 

NAB’s modelling forecast a range where 10 per cent was the baseline. 

“The latest economic work we’ve done shows 10 to 15 per cent reduction (in property prices) mainly in the largest cities … where prices have come off a wee bit over the last three months,” Mr McEwan said.  

“In some other country areas, we don’t see much of a change.”

Some regional areas may be experiencing an increase, he said, because remote work made living regionally possible.

Some people may have to downsize: banks

The best financial option for some people who cannot afford their mortgage could be to sell their properties, the two chief executives warned. 

This would be in the event the options of extending deferrals or restructuring loans would not help -- but actually heighten financial difficulty. 

“I think certainly, as we go through the next period, there will be some people who may not have enough income to service their loans,” Westpac’s Mr King said. 

“... People who have had a substantial drop in their income, we need to talk to them sooner than later”

Mr King said the number of defaults is uncertain, due to factors including government subsidies and possible future lockdowns. 

The decisions would be difficult but made with compassion, NAB’s chief executive said.

“We will sometimes need to make the hard but right decisions,” Mr McEwan said. 

“Lending more money to customers who have little chance of repaying it will cause more harm in the long term.

“... Even though looking after customers will at times mean saying no, we will be compassionate when dealing with something as painful as selling a home or closing a business.”

Unemployment will be higher and uneven: banks

The unemployment rate will be difficult to forecast, the banks warn, but they were in agreement it will be high.

NAB’s chief executive said it couldreach 10 per cent in the first quarter of next year before falling to around 8 per cent. Then in 2022, it is forecast to fall to 6.8 per cent.

“It’ll be a far cry from the 5 per cent we’ve become used to,” Mr McEwan said.

The forecast comes shortly after the Australian Bureau of Statistics revealed 932,000 jobs were lost since the beginning of the year following the coronavirus pandemic. 

Westpac’s chief executive referenced the statistics in his response, before acknowledging it’s at the whim of many factors.

“Our official forecast is around 8 per cent,” Mr King said. 

“That’s pretty hard to pin down, there’s a wide range of outcomes depending on economic activity, government support and how both of those change over time.”

What will the recovery look like?

Both banks were clear: their modelling of an economic recovery depends on state borders being open.

Following the 7 per cent contraction the economy experienced in the second quarter, Westpac is forecasting a recovery of 1.8 per cent for the third quarter.

“We think from here (the gross domestic product) should improve,” Mr King said. “We think it was a pretty tough quarter.”

NAB’s forecasts were less optimistic. 

“The fall during the year is now approaching 7.8 per cent,” Mr McEwan said, “but a stronger rebound up 4.5 per cent (is forecast for) next year.” 

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Learn more about home loans

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.