Kristina Carson knows this is not a free pass to get out of prison. But along with nearly 500,000 others, the Brisbane cafe owner needed help from her bank when the coronavirus pandemic devastated her business.
Australian banks have granted a six-month pardon to thousands of clients like Carson under their mortgage deferral program, which, along with the government’s job retention program, has kept households going afloat since the pandemic took hold in March.
“When the opportunity arose to defer loan payments, it was really a necessity for me to do it,” Carson says. “I have a 14 month old son and another on the way in August so we had to make sure we could keep a roof over our heads and that was a big help.”
The big question now is what will happen when the program expires in September – as it is clear that the crisis-induced economic slump has a way to go.
Australian Treasurer Josh Frydenberg has already admitted the country is in recession without even waiting for official confirmation. The last unemployment figures released this week showed that the unemployment rate is 7.1% and most economists believe it will double in the coming months.
This is a rapidly changing situation, and while Australia’s efforts to stop the spread of the disease have boosted confidence, banks know that many people will not be returning to their pre-Covid income anytime soon. With that in mind, they’ve started talking to their clients to see if they’ll need more help after September.
For people like Carson, who has home and business loans totaling over $ 500,000 with NAB, it’s unclear what will happen, although she expects negotiations with her bank.
“The payment deferral ends after six months, so we have no idea what the future holds,” she says. “We will re-evaluate with them and see what they can offer.
“We know that this program is not a no-get-out card and that interest has to be paid.”
According to a spokesperson for the NAB, the bank is now reaching out to its customers “to register, see how they are doing and understand where we can help them”.
Carson has a news agency in Brisbane’s CBD and opened a cafe, Más Espresso, last March. Together they employ 17 people. Both companies depend on foot traffic, and although she says many offices have reopened in recent weeks, they cannot accommodate all of their workers due to government distancing rules.
“Even if they all come back, there will be maybe only 30% occupancy, so we envision a city of only 30% capacity,” she says. “We rely on foot traffic, so that’s a long-term thing. We’ll have to think about staffing levels and what we’re ordering from suppliers.
The looming economic cliff edge worries the whole country, including Sydney’s Martin Place, where Reserve Bank experts are bracing for the worst.
Documents emerged this week revealing the RBA was considering advising the government to suspend real estate transactions during the pandemic in order to prevent the real estate market from collapsing. The RBA believes prices could drop 15% in a worst-case scenario.
The payment deferral program and job retention have so far helped allay these fears, and the RBA believes that major retail banks and the government will run the programs in such a way that the economy does not fail. do not collapse.
Financial comparison site RateCity.com.au warned that there is a hidden cost to the deferral program as homeowners’ payments would end up being higher. Someone with $ 400,000 to pay on their mortgage who has suspended their payments for six months would see their total balance increase to $ 407,203, which means they will pay an additional $ 62 per month on their loan.
“In the long run, mortgage deferrals come at a huge cost,” says Sally Tindall, Research Director of RateCity. “Banks continue to charge their customers interest even when the loan is suspended. This is something that a lot of people we spoke to were not aware of.
“The biggest problem is what happens at the end of the six-month break if someone still can’t pay off their mortgage. Time is running out for these clients who have not been able to find a job and probably feel they are on borrowed time.
Additionally, mortgage stress is on the rise, with 37.5% of homeowners under pressure compared to 32% before the crisis, according to a study by Martin North of Digital Finance Analytics. He says bank and government support programs helped lessen the blow to many people who lost income in the initial phase of the crisis, but he detected growing stress on more professions.
“We are starting to see pressure on higher end jobs. It started with young people in low income jobs, odd jobs, but now they are more stable jobs, ”he says. “If the September cliff face emerges, it will put pressure on companies to downsize. Unemployment could remain high for a long time.
He predicts that the banks and the government will do everything in their power to maintain people’s creditworthiness and avert the potential disaster of thousands of homeowners forced to sell their properties because they cannot meet the payments.
“The question is, what will the banks do? said North. “They are in no rush to foreclose on people because it means they have to report bad debts and it means they have to hold more capital. So they will try to do whatever they can to allow people to keep their homes – they will prefer that to foreclosure because it only cuts their noses to upset their faces, as is the scale of their investment in the housing market. “
On the sharp end, Carson is hoping the banks will do just that as she tries to stay the course in the storm.
“It’s a little easier to know that we’re going through this with everyone,” she says. “But not knowing how long it’s going to last makes it more difficult. I therefore hope that the banks will be understanding and united. Only time will tell what they demand of us.