While many of Australia’s lenders are now enabling distressed customers to defer their loan repayments for six months in response to the economic fallout from the coronavirus outbreak, there has been some uncertainty in the market over how lenders would treat these repayment holidays on credit files.
Typically, missed loan repayments are recorded in a borrower’s credit file, with the credit score worsening for each month a repayment is missed.
However, the Australian Prudential Regulation Authority (APRA) and several credit reporting agencies and lenders have already advised that – as these hardship arrangements are made in agreement with the institutions themselves (rather than being a missed repayment) – they are therefore a variation of the terms and “need not treat the period of the repayment holiday as a period of arrears”.
On Monday (6 April), the Australian Banking Association (ABA) announced that its members had now confirmed a common approach regarding the treatment of loans falling under COVID-19 relief packages.
It has now been agreed that any Australian who is granted a deferral on loan repayments on their mortgage or other credit products, such as a credit card, will not have their credit rating affected as a result of that deferral (provided they were up to date with repayments prior to COVID-19).
As well as providing consistency, it is hoped the announcement will “relieve stress for Australian customers”.
The CEO of the ABA, Anna Bligh, commented: “If a customer is granted a deferral on their mortgage and other credit products because of COVID-19, banks will report customers as not having missed a repayment, provided they were all up to date when granted relief.
“Australia’s banks are here to support customers who have lost their jobs or significantly lost income because of COVID-19, through initiatives such as offering a six-month deferral on mortgage repayments.
“Customers in these circumstances should not have to worry about their credit rating as well,” she said.
Moreover, Ms Bligh said that customers who are already behind in repayments when they are granted a deferral due to COVID-19 will also not see the repayment history information reported by banks.
Instead, ABA members have agreed to leave the field blank for the duration of the deferral period. When the COVID-19 repayment deferral period has ended, banks will then determine how to report the repayment history information, she said.
Ms Bligh continued: “There may be other factors which can affect a customer’s credit rating, but customers accepting a COVID-19 loan repayment deferral can rest easy that the deferral will not be one of them.”
She urged borrowers to contact their bank as soon as possible (preferably via digital means) should they require financial relief.
Financial Rights Centre CEO Karen Cox welcomed the ABA announcement, stating: “People calling our advice services have so much to contend with right now: the stress of not being able to pay their bills, fears for their own health and fears for loved ones. They should not have to worry about their ability to access credit when this is all over.
“We warmly welcome the ABA’s announcement that their customer’s credit reports will be quarantined from the impact of this crisis, and we call on the rest of the finance industry to follow suit,” she said.
Likewise, the CEO of the Australian Retail Credit Association, Mike Laing, said: “Once the crisis is over, consumers will be back in the market buying properties, cars and other things on credit. We know that many Australians are currently experiencing financial pressures due to COVID-19.
“Lenders are doing their best to help Australians through these difficult times – and get back on track once the recovery begins.”
He added that while lenders offering payment pauses are “making the process as easy as possible”, borrowers need to ensure that they are advising their lenders that they need assistance as soon as possible.
Mr Laing further warned: “While you might have access to the full limit on your credit card while making no or reduced repayments, you will have to eventually repay back the credit you use, plus any interest charges.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.