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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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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

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.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

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.

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.

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.

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.

Can I apply for an NAB home loan during maternity leave?

After you apply for a home loan during maternity leave, an NAB representative will first assess your income, assets, and liabilities to determine if you're able to meet the monthly repayments. Like all home loan applications, you will need to provide specific documentation to NAB while applying for the loan, including recent payslips from three months before your maternity leave, and a letter from your employer stating the details of your absence with the date of your anticipated return, tenure, and income. NAB will also analyse the expenses you need to bear while on leave, for example, utilities, childcare, healthcare services, etc. 

It’s crucial to let the NAB representative know that you’re pregnant and will be going into a paid or unpaid maternity leave, as it can mean a faster chance of approval. 

Similar to a regular mortgage application, you can borrow 80 to 90 per cent of the total property value if you meet the eligibility criteria. If you’re applying for a loan while pregnant, you may want to  consider borrowing 80 per cent or below of the total property value, as this may help  lower the monthly repayment amount. 

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.