$195 billion worth of mortgage deferrals will begin expiring next month. Here’s how banks will deal with customers who can’t afford their repayments.

(Steve Christo, Corbis via Getty Images)
  • ASIC sent a letter to lenders on Thursday notifying them of its expectations once mortgage deferrals expire.
  • The regulator has instructed lenders to begin contacting borrowers and assessing whether not they’ll be in a position to recommence repayments, and how to move forward if they cannot.
  • Commonwealth Bank CEO Matt Comyn has also canvassed the options of extending loan terms, moving customers to interest-only payments, and extending customer deferrals if customers are unable to afford repayments.
  • Visit Business Insider Australia’s homepage for more stories.

Australians who have deferred their loan repayments now have their first glimpse at what they’ll face when their grace periods begin ending next month.

In a letter sent on Thursday, the financial regulator ASIC has addressed the approaching deadline, formally outlining what it expects from lenders come September.

It’s the first major insight into how the financial system will deal with the unprecedented deferral program, which has frozen $274 billion of debt since the nation’s banks signed off on it in January.

With customers initially given up to six months, lenders are now working overtime to review cases and determine who is in a position to restart their repayments and who may need to kick the can down the road until January 2021, the current final cutoff date for the scheme.

“As such, we expect lenders to have processes in place that will allow for an orderly transition and importantly, deliver consumers appropriate and fair outcomes,” ASIC told lenders on Thursday.

The regulator then lays out a straightforward rundown of what they need to do in contacting customers and giving them a “reasonable” amount of time to consider their options.

In cases where customers aren’t able to make their repayments, lenders are expected to be thorough in figuring out their personal circumstances and – where they deem it “appropriate” – offer further assistance.

While ASIC doesn’t address specifics, Australia’s largest bank has given a glimpse of what lenders may be prepared to do to avoid a rising tide of bad debts.

Announcing its full-year results on Wednesday, the Commonwealth Bank revealed it has processed 250,000 loan deferrals in the last six months, with CEO Matt Comyn canvassing the options.

“There’s the possibility of extensions of repayment deferrals [beyond September] and it might also be appropriate for customers to recommence repayments but perhaps at a slightly lower amount,” he told media, noting that loans could be extended to provide some financial breathing room.

“For some customers who are on a principal and interest basis, which is obviously the majority, perhaps moving to interest only. Interest rates are very low.”

He also noted that while applications for new deferrals had been flat around the country in August, there had been an uptick in Victoria as the state shut down again.

“Of course, customer intentions and their ability to recommence their repayments to some extent are going to be dependent on the broader economic and health situations,” Comyn said.

“It’s certainly possible [that deferral numbers will rise],” he added.

Certainly as Australia heads into the back end of the year, there looks to be an approaching economic crunch. CBA revealed this week that 13.6% of its mortgage deferrals were receiving JobSeeker payments, which are due to be reduced from next month.

While Comyn clarified to Business Insider Australia that 58% of those were joint accounts, meaning there is another potentially another borrower still in employment, it’s still a troubling statistic.

Having hired 1,000 additional staff just to deal with the caseload, all of Australia’s banks will need to now go through and find out which of their customers are back on their feet and which are in need of more help.

Either way, ASIC will be watching.

Have you frozen your mortgage? Are you concerned about when you will have to start making those repayments again? Get in touch at [email protected]