Banks warn selling the family home should be an option for a struggling few

Senior bank executives are warning some customers may have to sell their homes and downsize, rather than being saddled with compounding interest on a deferred mortgage they may not be able to afford.

The comments come a fortnight after financial regulators spelled out in an open letter to the industry that banks should exhaust the options available to keep customers in their homes -- where it is in their best interests.

For people struggling, selling the home could be the way to go: CBA

Commonwealth Bank is in the process of contacting the 135,000 borrowers who deferred their mortgage repayments to discuss their options.

This may include “alternative solution paths” such as downsizing the family home, Angus Sullivan said, the head of its retail banking division.

"If you had a lot of debt from [buying at the peak of the market] and you were in a difficult position from an employment perspective, [downsizing] would be exactly the type of solution that would be worth having a discussion about," Mr Sullivan told AFR yesterday.

"That is a hugely stressful thing for a family to go through. We can empathise with that at a personal level.

"We know most people don't make a decision like that quickly, they need quality and often repeated conversations to form the conclusion that is the best thing for them."

Owner occupiers represent about 72 per cent of the people who deferred their mortgages, Mr Sullivan said.

Over extended investors may also have to consider liquidating properties if they’re in a position of real financial strain, he said, with the banks having conversations to the effect of: "The property market is holding up pretty well, (but) you may want to make the decision to liquidate one of your investment properties and put yourself on a stronger footing.”

For some, mortgage holidays could prolong the pain: big banks

Senior executives at other big banks have said mortgage holidays might not be the best option for all struggling customers over the last month. 

Some would be in a better financial position if they sold their properties, Ross McEwan, chief executive of NAB, told the SMH a fortnight ago. 

"We’ll take every reasonable step to keep people in homes and keep them moving, but there unfortunately will be some situations where it’s better off for people to actually sell up and start again, so that they can take some equity out of the situation," he said.

Selling may be a better option than continuing to defer a mortgage because interest is still being calculated on the balance of the loan, Mark Hand said, group executive of retail and commercial banking at ANZ.

"We’re not forgiving repayments, the interest is being capitalised,” he told the SMH last month. 

“So whilst interest rates are low, the debt that you have at the end of the deferral period is higher than what it otherwise would have been … That will put a strain on the cash flow of a family or of a business.”

The coronavirus pandemic has caused volatility in the property market, Mr Hand said, and a lack of growth in some people’s portfolio may put them in a position where exiting the property market is their best bet.

"The growth that you might have anticipated might not come, so at some stage you’re going to have to say: ‘If I can’t afford this mortgage, am I better off to rent, put my capital aside and wait until I’m in a better position to buy back into the market?’,” he said.

"I just think there are people who are going to have to make those decisions in the next few months."

Work hard to keep people in their homes: regulators 

Australia’s financial regulators expect banks will exhaust their options when it comes to keeping people in their homes as best they can if they’re unable to pay off their mortgages.

The regulators, the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), published an open letter to the industry a fortnight ago, where they spelled out their expectations, and formalised additional relief measures for affected mortgage customers.

“ASIC expects lenders to make all reasonable efforts to work with consumers to keep them in their homes if that is in their best interests,” ASIC said in its letter.

“(We) recognises that there will likely be some circumstances where offering a consumer further temporary assistance may make their situation worse. 

“Such situations will need to be carefully identified by lenders and involve a high level of engagement with those affected consumers.”

The regulators announced customers impacted by COVID-19 and on a mortgage deferral will have the option of extending it for a further four months -- giving them the option of not making repayments for a maximum of ten months.

They also announced banks would be able to restructure loans -- provided it was in the best interest of customers. They would have to meet a benchmark set by the regulator and be restructured before 31 March 2020.

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