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Capitalised mortgage deferral costs ‘entirely manageable’: Lowe

The Reserve Bank governor is confident borrowers will manage higher mortgage repayments upon the expiry of deferral periods.

According to the latest data from the Australian Banking Association (ABA), approximately 430,000 home loan customers have deferred their home loan repayments in response to the COVID-19 crisis – equating to over $150 billion in mortgages.  

For most borrowers, the deferred amount will be added to their monthly repayments over the remainder of their loan term once the deferral period has expired.

This has raised questions regarding a borrower’s capacity to service their home loan in the longer-term, particularly those most impacted by the economic downturn.

Appearing before the Senate Select Committee to discuss the central bank’s response to the COVID-19 crisis, governor of the Reserve Bank of Australia (RBA) Philip Lowe was asked if he was concerned about the impact of higher mortgage repayments on household balance sheets.


In response, Mr Lowe said the extent of the impact would depend on the trajectory of the unemployment rate, adding he is confident borrowers who retain employment would manage the hit to their back pockets.  

“What I am focused about is people getting jobs and income security,” he said.

“If people have got their jobs back and income back, then people will be able to pay their mortgages back. 

“The fact that people have a bit more interest to pay over their loan – which could be another 15 years or so, spread out – that’s entirely manageable if you’ve got a job and if you’ve got your income.”

This comes amid new research from Morgan Stanley analyst Richard Wiles, which revealed that mortgage deferrals could increase the major banks’ regulatory expected losses by approximately $4.3 billion while also reducing their CET1 ratios by an average of 35 bps.


“The majors have approximately $1.9 trillion of residential mortgage exposure. Only $16.4 billion or 0.9 per cent of balances are in default and the expected loss is $5.2 million or 0.3 per cent of exposures,” Mr Wiles said.

“Using Westpac’s detailed exposure, we estimate that if 20 per cent of deferred home loans eventually default and the remainder move one probability of default band lower, the expected loss on a mortgage portfolio would rise 185 per cent.”

Mr Wiles warned that the sharp increase in credit losses could lead to a new wave of credit provisioning.

Thus far, the big four banks have set aside over $7.2 billion in credit provisions in anticipation of a COVID-induced deterioration in credit quality.

Last month, S&P Global Ratings reported that it is forecasting an 85 bps increase in credit losses across the Australian banking sector’s loan portfolio in the 2020 financial year (FY20).

The 85 bps increase, which is expected to moderate to 50 bps in 2021, amounts to approximately $29 billion in gross loans, nearly six times higher than the record low in FY19.

[Related: Outlook turns negative for mutual banks]

Capitalised mortgage deferral costs ‘entirely manageable’: Lowe

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Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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