It seems that every other month we have another parliamentary inquiry into the banks. With so many regular appearances you’d think it would start to get boring.
In the inquiry held this month there were no juicy money laundering scandals to report, but Westpac CEO Brian Hartzer revealed a startling statistic: of Westpac’s $400 billion loan book, half of the loans are interest-only. The other Big Four banks each have 40% of their loan books with interest-only loans.
An interest-only loan is one where for a period of time the borrower only pays the interest on the loan balance, with the loan balance not being reduced. If we add up all the Big Four banks’ loan books, it comes to about $1 trillion worth of home loans where people are not making any dent in their mortgages. If the average mortgage is about half a million dollars, that’s a huge amount of debt not being paid off by individual households.
It will be interesting to see what happens when these interest-only loans flip over to principal and interest loans, as normally happens after five years.
This has ominous similarities to the situation that led to the Global Financial Crisis of 2008. As UNSW Professor Richard Holden noted: “Australia's large proportion of five-year interest-only loans — turbocharged by an out-of-control negative-gearing regime — looks spookily similar.”
Currently, 820,000 households, or 1 in 4, are in mortgage stress. The banks have increased rates on interest-only loans, arguing that this will help borrowers pay down their loans faster. But this change has a greater impact on households in mortgage stress. They will be at greater risk of defaulting on their loans, which could snowball into a full-blown crisis.
What do bank CEOs currently being grilled by parliament have to say for themselves? Surprisingly little.
They say they have raised interest rates for interest-only loans not to boost profits, but for the good of their customers and the economy. Really?
In reality, they’ve only done what was needed to ensure the continued flow of mortgage revenue into their coffers. After all, it wouldn’t profit a parasite if it were to kill its host.
We can continue to drag these bank CEOs to as many parliamentary inquiries as we want. We can even throw in a much needed royal commission. But ultimately none of it will solve the root cause of the problem, which is the profit-driven system we are living under.
Capitalism is what drives the banks to fuel an overpriced housing market by selling mortgages that enslave workers to debts they may never repay. Surely it’s time to nationalise the banks, put them under workers’ control and fix the housing crisis through the expansion of public housing.
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