Loan Repayments and COVID-19

For years I have urging borrowers to get ahead in their loan repayments, not only to provide a safety buffer if interest rates rise or they suffer financial stress, but also to save a fortune in interest.

I was horrified when a Commonwealth Bank client sent me an email they had received which read: “We’re taking steps to continue providing the financial support our customers need. This is why we’re making a one-off change to your home loan direct debit repayment amount, reducing it to the current minimum required payment.” The bank then clarified that this was an “opt-out” procedure, that is, borrowers who want to continue with higher repayments must go out of their way to do so.

Any marketing consultant will tell you that setting the default to “opt out” is a major tool in getting people to make a change you would like them to. Think about it: most of us suffer from a barrage of paperwork, seldom read the fine print, and even the thought of having to go to somebody’s website and do all the hard work to “opt in” is enough to make us shudder. It is hardly likely to happen.

it’s hard to escape the conclusion that it’s just a sneaky way for CBA to boost its profits. The bank could just as easily have written to their customers along the lines of, “We appreciate these are tough times, but urge you to continue making your payments at the current level to pay off your loan as fast as possible and continue saving interest. However, if you need to reduce your payments, please contact us.” That would make the option available to those who need it, but by making it “opt in” not “opt out” more people would keep making the higher payments that are in their own best interest as long as they can afford them.

Thanks to COVID-19, many financial institutions are making a lot of noise about being “here to help you”. Unfortunately, most of their offers come in a poisoned chalice. It’s not just the Commonwealth Bank offering borrowers a chance to reduce their monthly mortgage payments, it’s also the other institutions offering the opportunity to defer six months’ mortgage payments, or three months’ credit card payments while interest and fees continue to accrue. This is just another ploy by lenders to collect interest on interest. Don’t fall for it.