ABC Radio: interest rates, default rates & bank assistance

Transcript: ABC Radio Hobart, Mornings with Kylie Baxter, 3 August 2022

ABA CEO Anna Bligh spoke with ABC Radio Hobart’s Kylie Baxter on historically low interest rates, low default rates and what to do if a customer has difficulty with their mortgage repayments.

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Kylie Baxter: The Reserve Bank of Australia announced yesterday it was raising rates by half a percent, bringing the cash rate to 1.85%. And that, of course, is going to have a flow-on effect for pretty much everyone who has a home loan. So, what will that mean for you personally? Anna Bligh is Chief Executive of the Australian Banking Association and joins me on the programme now. Welcome to Statewide mornings, Anna.

Anna Bligh: Good morning. How are you?

Kylie Baxter: Well, thank you. So how much will the average mortgage go up? I know, that’s a bit like how long is a bit of string, there’s many different mortgages. But you know, with this increase, if we were looking at, say, $500,000 on a mortgage?

“I think it’s important to understand that, you know, we were at emergency low interest rates at the beginning of this year. The Reserve Bank has been saying that at some point that would have to normalise.”

ABA CEO Anna Bligh

Anna Bligh: I can’t do the calculation in my head at that rapid rate, but I can say that, it will mean an increase that people will definitely feel, obviously, depending on things like their income, and their circumstances. But I think most people are going to definitely feel the increase that that is coming on their mortgage. And for most people, it’s going to mean, some belt tightening in other aspects of their spending.

Kylie Baxter: And what percentage of mortgages according to your calculations, are likely to be in danger of default, because I imagine that is something that you would be assessing as the interest rates creep up?

Anna Bligh: Obviously, as interest rates go up, and then the cost of a mortgage increases, it does put some people at more risk. I think it’s important to understand that, you know, we were at emergency low interest rates at the beginning of this year. The Reserve Bank has been saying that at some point that would have to normalise.

“on average Australian mortgage holders are 45 months ahead in their mortgage payments”

Going into this, this period of interest rate increases, the APRA data from the prudential regulator shows that on average Australian mortgage holders are 45 months ahead in their mortgage payments. Now, averages can be deceptive, some people are obviously a lot more than 45 months ahead. But others are obviously a lot less. And for some people, they’re not ahead at all.

Kylie Baxter: Yeah, I was really surprised at that data. I heard that as well. 45 months ahead, because when I mentioned that to someone everyone’s like, well, that doesn’t seem to be the case in Tasmania. We’ve been hearing that Tasmania is in greater mortgage stress than say people in other states. Are you seeing any similar data, or is that not really coming through yet?

Anna Bligh: No. What we know is, what banks start to report on is what’s called the 90-day default rate, that means you’ve missed three monthly payments, that’s when they start to try to reach out to you and say “what’s wrong? Are you in trouble? What’s going on?” – there’s been no increase in that default rate yet. And in fact, it’s lower now than it was in 2019, before COVID, or before interest rates started to rise.

“there’s been no increase in that default rate yet. And in fact, it’s lower now than it was in 2019, before COVID, or before interest rates started to rise.”

But that again can be a bit deceptive, because on average, it takes about six to eight weeks, for an interest rate rise to impact the mortgage holder. Banks might announce it, but you don’t have a payment for another four weeks, or they might take two or three weeks before they put it in place. And then there’s another four weeks before your payment is due. So, I think we haven’t yet seen the full impact of the last interest rate rise, and we won’t see the full impact of this one. So, it’s the cumulative effect.

And I think what we’re worried about in the industry is looking at what people might be feeling in about December, when the full cumulative impact of these rises, are really felt. And of course, that’s leading into Christmas, which can often be an expensive time. But I think it’s really important for your listeners to understand that banks have very practical ways of helping people that are finding it tough and getting into trouble. And the earlier that people speak to their bank, the more likely it is that the bank can find a solution that will work and keep the customer out of financial strife.

“the earlier that people speak to their bank, the more likely it is that the bank can find a solution that will work and keep the customer out of financial strife.”

Kylie Baxter: And just quickly, if you can’t make your payments, you refer to the 90 days before the bank, you know, gives you that call and taps you on the shoulder and says, you know, how are you going? But how long do you have before the bank would move in to take your house?

Anna Bligh: Oh, it would really depend on your circumstances, but I can say that it does not happen quickly. Banks do everything they can to help people, they often put them on to a period of lower payments, they can actually put them on to a period where they defer the payments for a while. It really depends. It’s a case-by-case basis.

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Obviously, everybody’s circumstances are different. If you’ve already owned your house for 10 years and never missed a mortgage payment, and one of the people in the relationship, you know, has lost their job or had their hours cut, as well as interest rates going up at the same time, I think banks would find a way through for you, or you would be able to reduce your payments, potentially, for a three, six-month period, until you get back into the workforce and earning what you had been earning before.

So, it really is about everybody’s circumstance. How much have you paid off already? What’s happening with your income? You know, what’s the best thing for you. Banks start from the point of view that keeping people in their own homes is the best outcome and moving to foreclose on a mortgage is the least desirable outcome for the customer and frankly for the bank. So, there’s a lot of working through and talking, and the people who are most likely to end up in real trouble are those that don’t answer the phone call, don’t talk to their bank …

Kylie Baxter: …Yes, that’s the critical part isn’t it. You’ve actually got to respond to the bank. Well Anna Bligh thank you so much. We’ve run out of time, but it’s been great to have a chat and really just get some clarity on that, appreciate it.

Anna Bligh: The clear message is – talk early.

Kylie Baxter: Yes, indeed, yes cheers. That was Anna Bligh, Chief Executive of the Australian Banking Association.

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