One of Australia’s major banks has offered relief to thousands of property investors who hold interest-only home loans, responding to claims the industry is not doing enough to stave off a potential property crisis.
- Many investors are being forced to pay more as interest-only periods end
- This means they will now have to pay principal and interest on loans
- They fear being forced to sell in falling markets if they can’t meet payments
Westpac has pledged to extend borrowers’ interest-only periods after WA Senator Dean Smith criticised the industry for failing to support landlords, many of whom are self-funded retirees, who were struggling with higher repayments due to their loans switching to principal and interest.
Senator Smith said he would canvas support for a Senate inquiry into the banks’ treatment of property investors after hearing disturbing stories of financial hardship.
He said he feared investors pushed to the wall could lead to a worst-case scenario of a “tsunami of forced sales”.
Westpac has now confirmed borrowers can apply to extend the interest-only periods of their loans for up to a year, instead of being forced to start paying the principal of their loans when it expires.
“This includes allowing interest-only customers to extend their loan term for up to 12 months or customers on principal and interest repayments to switch to interest-only repayments for the same period,” Will Ranken, Westpac’s general manager of home ownership, said.
Investors fear ‘we’ll have nothing left’
For Adelaide couple Dianne and Brian McShane, whose loans are with a different bank, Westpac’s statement offered little hope.
The self-funded retirees were already struggling with their loan repayments before coronavirus hit and now their tenants on the Gold Coast have had to break their lease due to the pandemic.
Ms McShane, a former administrative assistant, and her husband, an ex-electrician, started investing in property 20 years ago to try to fund their retirement.
They currently have three investment properties, two in Queensland and one in Western Australia.
But instead of earning an income from them, the couple in their 60s are paying $9,000 a month to the bank to cover their loans, which switched from interest-only to principal and interest last year.
Mr McShane said the couple were running out of funds and would ultimately be forced to sell in the falling housing market.
“There will come a day when we are going to run out of money because we are paying all this principal and we’ll have to sell everything, and we’ll have nothing left,” he said.
“And we’ll have to rely on the pension.
The couple said they asked their bank 12 months ago if they could retain their interest-only terms, but that their application was rejected because they were no longer in the workforce.
They said the bank rang them earlier this week to indicate that they could apply for a new loan, but the pair had little confidence that it will be approved.
Investors are ‘not fat cats’
Sydney investor Mike Scotland, a former school teacher, owes $1.1 million to the banks and is in a similar predicament.
Mr Scotland has six investment properties and all the loans have switched to principal and interest.
“The rationale was that there is no way to gain wealth in Australia unless you invent a better mousetrap, win the lottery, have a brilliant business or maybe you do a bit of investment,” he said.
“They’re not rich, fat cats, they’re just people trying to get ahead for the most part.”
Values and rents fall simultaneously
Mr Scotland said all of his properties had either fallen in value or flat-lined, while rents had also dropped.
He envisaged he would have to sell in eight or nine months’ time, at a loss.
“So I’m heading towards a deadline, I’m heading towards a cliff,” he said.
“The banks are putting a lot of pressure on the economy, that’s really the situation.”
Property investors to be hit hardest in COVID downturn
Westpac’s policy is in line with recent advice from the Australian Securities and Investments Commission (ASIC) that the banks could extend interest-only terms during the COVID-19 pandemic and it would not trigger responsible lending obligations.
Chief economist with REA group Nerida Conisbee said property investors would be most affected by the COVID downturn because of the impact on the rental market from job losses.
But she said it was in the banks’ interests to support their customers through the difficult times.
“I can’t see it happening that the banks would allow wholesale default of loans or wholesale distress in the property market by forcing people to sell to pay back debt,” she said.
“The banks are well capitalised.
Ms Conisbee said crunch time for the housing market would come when borrowers, including investors, reached the end of the leniency period for mortgage deferrals the banks had introduced.
“The big concern now is what happens after that six months,” she said.
‘Creating more problems for the future’
Banking analyst Brett Le Mesurier said the banks had already offered considerable relief to mortgagees, granting relief from paying interest.
“It is not like they are taking a hard approach to their customers,” he said.
“They are actually taking the most sympathetic approach they have ever taken, but of course there are obviously examples that this Senator is aware of where customers are not getting the sort of relief from the major banks that others are.
“The danger for the banks granting a lot of relief to people is that you are just creating more problems for the future.”
NAB issued a statement saying it had a team contacting customers approaching the end of their interest-only terms to work with them on the “right solution, which can include restructuring a loan if required”.
This included a fast-tracked process for customers with interest-only loans due to expire in the next six months to extend their interest-only period for a year, but this would not apply to borrowers who had reached their maximum interest-only term.
ANZ did not respond to the question of extending interest-only loan periods but said customers could request a repayment deferral on their home loan for up to six months and this included investors paying interest only.
The bank said 105-thousand home loan customers had sought assistance.
Senator Dean Smith said he welcomed the prospect of more flexibility by the banks, providing the application process for borrowers was not onerous, and requests for extensions were actually granted.
“It’s encouraging to see one of Australia’s major lending institutions change its policy towards the extension of interest-only loans, but these changes now need to be made industry-wide,” he said.
“I again call on the entire Australian banking and finance sector to extend interest-only loan repayments until the pandemic’s financial fallout has passed.”