'Bow wave' of mortgage pain ahead, credit agency says

Saturday, 5 September 2020

Households taking home loan 'holidays' will end up paying more in the long-run.

Financial hardship has hit every type of Kiwi household since Covid-19 arrived on our shores.

Wealthy executives have been let go by overseas employers.

Low-paying hospitality jobs have gone by the wayside.

Families with single earners have felt an almighty financial squeeze. In response, more than 84,000 households have asked for mortgage deferrals since March.

The Government and Reserve Bank’s mortgage deferral scheme was introduced to give Kiwis a chance to reduce or pause home loan payments, or switch to interest-only terms, to get through the economic crisis.

* Homeowners warned not to expect automatic extension of loan 'holidays'

* Reserve Bank considers extending home loan holiday lifeline

Banks have been given permission to grant the deferrals without the Reserve Bank considering those loans as black marks on their accounts.

Initially due to expire this month, the deferral programme has been extended until the end of March. The broadened scheme gives valuable breathing space to New Zealanders in financial distress, but delays the impact of Covid-19 on homes and banks’ balance sheets. In six months’ time, borrowers will still be struggling, and lenders will need to face the crisis head-on.

Banks are trying to calculate their exposure to bad loans. Kiwibank last week recorded “credit impairment” provisions of $51 million over the past financial year, with just under half of that related to home loans.

The mortgage holiday scheme has been extended but it won’t last forever.

ANZ New Zealand, the nation’s biggest lender, expects impairments of $232m. The estimates are set to change as the scale of economic damage emerges.

Bank data indicates thousands of people have moved from deferrals back to regular payments.

ASB says the number of its customers on home loan support has fallen from 24,000 to 13,400. ANZ says deferral numbers have dropped from 22,500 to 18,000. Westpac says 4400 customers have exited deferrals or interest-only terms.

While thousands of Kiwis have begun repaying their mortgages, the most vulnerable customers remain in financial distress. More than 1000 households applied for deferrals in the first three weeks of August as Auckland re-entered lockdown. Anecdotal evidence on the frontline suggests a sizeable percentage of people on deferrals will use the extension.

Bruce Patten, an Auckland-based mortgage broker at adviser group NZFSG, says 7 per cent of his clients took deferrals or moved to interest-only terms. Half of those have resumed normal payments, but many will need more time to get their finances in order.

“Probably a quarter of those on deferral are going to need an extension,” Patten says. “It’s a crazy situation, because the banks don’t even have a process for granting these extensions yet.”

Patten believes borrowers will find it harder to get an extension, with banks asking more probing questions.

“It won’t be a simple phone call like last time. They’ll want to understand the client’s position, so both parties have time to consider selling the property, if that’s appropriate.”

Bruce Patten says he’s seen “the odd mortgagee sale”.

Patten has started to see some defaults crop up, “albeit in low numbers”.

“We have seen the odd mortgagee sale,” he says. “It’s hard to tell how many people are going to remain out of work. The stats aren’t showing it at the moment, and we won’t get a good gauge on it until next year.”

Keith McLaughlin, chief executive of credit reporting bureau Centrix, is concerned that deferrers will slip into arrears. He says 13,500 home loans are in arrears, with many people forgetting to access the government scheme.

McLaughlin says about 1.8 per cent of mortgage deferrals have gone into arrears, presenting difficulties for under-pressure lenders.

“The bow wave that’s coming will be a challenge,” McLaughlin says. “It’s very important that customers contact their credit provider or lender and talk to them. Because most lenders will work with the person to restructure.”

He expects Covid to affect “a far-wider band” of borrowers than the GFC, and is particularly concerned for regions reliant on tourism. “About 11.9 per cent of the mortgages in Queenstown applied for and received a deferral on their payments.”

McLaughlin is fully-supportive of the deferral extension and decision to grant borrowers a reprieve.

“It’s absolutely the right thing to do. People have to be assisted through this process. It gives people time. At the moment, that’s all you can give people.”

Claire Matthews at Massey University agreed the extension was “necessary”, but believes the damage from Covid will last beyond the end of the scheme.

“The economic impact of Covid-19 will be felt more in the future as some of the other schemes start to run out. Businesses will start to recognise that this is a longer-term issue, and they will have to make some hard decisions. That’s when people will lose their jobs and income.”

While the can has been kicked down the road for now, tough decisions lie ahead.

Matthews believes banks will need to have definitive restructuring conversations with struggling borrowers next year, exploring solutions like loan term extensions, as well as sales.

“You can’t keep extending forever. Customers will be accruing interest, and debt is growing. They [deferrals] are for temporary situations.”

McLaughlin believes lenders will review customers “case-by-case” after March, and seek to avoid forced sales where possible.

“Banks won’t give a blanket extension. It may come time to restructure loans, turn them into interest-only, extend the loan by five years. I think those sorts of discussions will take place. It’s the only way. They will need to sit down and how to address customers.”

“The banks don’t want to kick people out of their homes. They would far rather sit down and restructure the loan than take hardline action – provided there’s cooperation on both sides.”