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CBA allows interest-only switch as banks prepare for COVID-19 ‘check-ins’

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One way of softening the impact is for banks is to be more lenient in allowing customers to pay only interest for a year.

CBA’s group executive for retail banking Angus Sullivan said: “We recognise that as the coronavirus situation evolves and customers start returning to work, they may require alternative temporary assistance measures to help them get back on their feet sooner.”

“As part of this we are temporarily allowing existing home loan customers to apply for a one-year interest only extension or switch if they are currently making principal and interest repayments without requiring a serviceability assessment.”

CBA’s move, which is similar to changes announced by Westpac last week, comes after regulators that were previously cracking down on interest-only lending are now giving banks more leeway due to the pandemic.

Principal of consultancy Digital Finance Analytics, Martin North, said moving people with deferred loans onto interest-only payments made short-term sense for banks because it meant lenders would not need to classify the loans as troubled, which would attract higher capital charges.

“It gives them some income, it gives them some wriggle room, and it gives them the ability to not have to report these as bad loans,” Mr North said.

However, Mr North pointed out that interest-only loans can also be higher risk for borrowers and banks. If house prices fall — which major banks are forecasting — interest-only loans are at higher risk of ending up in negative equity because, the loan balance does not fall over time.

“You’ve got to be really careful with interest-only loans that you don’t end up with a mortgage that’s worth more than the property,” Mr North said.

CBA’s move follows a surge in bank shares last week, amid predictions the damage to banks from COVID-19 will be less severe than feared.

So far only a small minority of customers have cancelled their loan deferrals, with Westpac saying 4,000 people or almost 4 per cent of those granted a deferral have voluntarily resumed repayments. ANZ Bank said more than 2,000 people, or about 2 per cent of those with deferrals, had resumed repayments. Other banks are expected to provide more detail on this trend soon.

In another sign of the pandemic’s impact on banks, Australian Prudential Regulation Authority (APRA) figures on Friday showed household deposits with banks surged by $22 billion to more than $1 trillion in April, a trend that is likely to further add to easing in bank funding costs.

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Macquarie analyst Victor German said the strong growth in deposits could reflect government payments, early withdrawals from superannuation funds under an emergency government scheme, and households’ cautious approach to spending.

Among the big four, CBA’s household deposits swelled by $6.7 billion, Westpac’s rose $3.6 billion, ANZ Bank’s lifted by $2.5 billion and NAB’s increased $2.4 billion, the APRA data showed.

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