Aren’t the banks lovely to let their home loan customers take a six month break from mortgage repayments! Only one catch … they are charging compound interest; interest on their interest. Michael West reports on the hardship of the banks versus the hardship of their customers.
In true Shylockian fashion, the banks are poised to make a profit by charging interest on their interest. As millions of Australians lose their jobs and their customers, the banks have been gifted $90 billion to lend – which is effectively a gargantuan liquidity package (dubbed “QE”, or quantitative easing so nobody can figure out they are creating new money out of thin air).
How good is free money!
Lest bank customers protest at the compound interest sting on their mortgages – the interest charged on their interest – they would be well served to bear in mind that their credit cards are far more menacing.
Credit card rates are still hovering at record highs, some up near 20 per cent. And it is the fantastic plastic to which many Australians will now turn to pay their bills.
If you have a $500,000 mortgage and take your bank up on its offer of a six month holiday from repayments, that will cost you $225.04 in compound interest at 3 per cent. A tidy earner for the banks but not even in the same stratosphere as credit cards.
A mere $10,000 Visa Card debt unpaid six months at 17.5 per cent costs $154.11. And that is before admin fees.
Bear in mind, and it came without a whimper in the media, that the banks point-blank, nonchalantly, refused to pass on the most recent 25 point interest rate cut to mortgage customers or credit card customers, a cut designed specifically to help Australians with their debts.
And credit cards
Credit card rates are now up to 80 times higher than the Reserve Bank of Australia’s cash rate. Despite the coronavirus chaos and the banks swimming in an abundance of cheap credit, their credit card rates remain at all-time highs.
So, how are the balances tallying up, the freebie balances that is, the balance of corporate welfare versus social welfare?
Quiet Australians who have lost their jobs or fallen into a spot of bother get the exciting opportunity to pay extra interest on their mortgages. There is no credit card relief. They only get a slice of the $90 billion QE action if they are a small business which still has customers.
As QE has privatised the decision-making to the banks, the banks are hardly going to lend to a business with no customers and few small businesses will be chasing a loan anyway. What they want is customers.
Meanwhile, quiet Australians on the lowest incomes are disadvantaged by the small business bail-out package because the package rewards employers for keeping their higher-paid staff and discarding their lower paid.
For a worker on $15,000 a year or less, no assistance is given. For a worker on more than $50,000, the employer picks up a monthly benefit of $800. The package may be deliberately designed this way but it mitigates against the poorer employees.
What do the banks get?
How about the banks though, what sort of government packages are they enjoying?
Well, the $90 billion QE facility means the Reserve Bank creates new money and they get to lend it for a profit. They don’t have to lend it to small business; in fact they are incentivised to lend it to big business which has the means to repay. Therefore lending fees.
Then there is the CLF or Credit Liquidity Facility, a $250 billion bail-out fund set up during the Global Financial Crisis, underpinned by taxpayers, which the banks can draw upon should they have trouble finding money.
There is the “repo” facility too, which has been getting a mighty work-out lately. This little earner allows the banks to swap their assets (loans such as RMBS) into the Reserve Bank for cash.
Next: income relief – the latest rescue investigated.