“They are the ones who concern us the most,” said one banker.
These borrowers have typically lost their jobs due to the coronavirus, which means they are no longer earning enough income to meet their mortgage payments.
Not only will they likely need the full six-month deferral on loan repayments, but bankers have started talking to them to see if they will need to extend their loan repayment leave by one, three, or even six months.
“When we look at the data, we can see where there has been a loss of major salaries,” said one banker.
“[But] this does not take into account that someone else in the household may have additional income on an account with another financial institution. “
Better patience for owners
Bankers also review the loan repayment options available with clients. For example, if borrowers can no longer afford a standard loan with principal and interest, it might be better for them to switch to an interest-only loan.
Likewise, those paying a mortgage rate of, say, 3.5 percent, may want to take advantage of ultra-low interest rates and switch to a fixed-rate mortgage of around 2.2 percent.
Bankers also report that home loans for investment properties work as well, if not better, than homeowner loans.
Still, banks are inclined to show the utmost tolerance towards people who have borrowed to buy property that is their primary residence and who have lost their jobs during the pandemic.
“Where there are people with three or four investment loan properties, we start to have a conversation with them about whether to sell a property or two,” said one banker.
Bankers believe the steps they are now taking to reach out to borrowers in financial conflict mean fears that the housing market is teetering on the edge of a cliff when the six-month mortgage vacation expires are overblown.
Instead, the bankers emphasized that they were ready to keep people in their homes after September and until 2021, rather than forcing them to sell.
After all, it is not in the best interests of banks or borrowers for a flood of distressed goods to enter the market.
On the other end of the spectrum, around 20% of clients who requested a deferral of their loan repayments continued to repay all or part of their regular loans, suggesting that they are in much better shape than expected.
Bankers contact this cohort of clients and ask them if they wish to continue to defer repayment of their loan, especially as the capitalization of repayments lengthens the term of the loan.
The author owns shares in major banks.