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

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 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.

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.

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.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.