Why those in financial stress need a buffer too

That life throws unexpected curveballs was never more fully on display than when COVID-19 broke out.

With very little warning, millions of people lost their livelihoods as the economy went into hibernation.

Although we’re not quite out of the woods, fortunately the lifelines of government relief, central bank support and loan deferral packages from the banks have seen our national economy bounce back quicker than expected.

But not everyone has come back from the profound economic shock, with many families across Australia still doing it tough.

Among Westpac customers, of the 149,000 mortgage accounts that deferred repayments in the first anxious months of the pandemic, the vast majority – more than 92 per cent – had returned to normal payments or paid down their loans as at the end of March, but around 9600 still required assistance. More than half of these have had their loans restructured, mostly moving to a 12-month interest only period, while around 4500 have moved into hardship arrangements, and a dedicated team is working with every one of them to work out the best possible way forward. 

While very little compares to the scale of the pandemic’s impact, people have faced many other financial curveballs long before COVID-19.

In fact, in each of the five years prior to the pandemic, on average almost 40,000 Westpac customers sought and were provided assistance from the bank after experiencing financial difficulty. Unfortunately, sometimes the repayment plans left little wiggle room and some customers found themselves struggling repeatedly so had to seek hardship relief more than once.

But we learnt through COVID that we could all do things differently.

That’s why we’ve started a pilot to include a “savings buffer” for mortgage customers in financial difficulty.

We’ve built an automatic tool that calculates reduced mortgage payments based on the customer’s budget plus a $100 per month savings buffer. This means eligible customers who need short term hardship support will be able to set aside some money for unexpected costs which might tip them into a worse financial situation, such as a car break-down, a higher-than-expected electricity bill, or unforeseen medical costs. 

It’s a change that financial counsellors in Australia have been seeking since 2016 – and we’re delighted we are now able to introduce.

What doesn’t change is the starting point of helping someone deal with their debts: a review of their income and expenditure, which is used, by the customer or their independent financial counsellor, to work out a more affordable loan repayment arrangement. What will change is the traditional expectation that 100 percent of any surplus income should be paid towards debt, in favour of a new expectation that a new line for savings will be included, after living expenses and debt repayments, at a level agreed with the customer of at least $100 per month.

Because when you’re doing it tough it’s hard enough to think about how to pay for a roof over your head and food on the table, let alone deal with an unexpected bill. It can nearly break you. In fact, research by Westpac shows one in two Australians have had to pay for unexpected bills in the past 12 months, ranging from auto repairs, home repairs, medical bills and pet emergencies. 

What’s worse is that 40 per cent said they would feel unprepared financially to cover these emergency expenses. 

By introducing a savings buffer, our hope is that customers in financial difficulty will have money set aside for unexpected expenses – perhaps a washing machine repair, school excursion, unexpected dental work – and avoid turning to higher interest products or payday lenders to ensure they stay on track. 

This buffer will mean the power is in the customer’s hands – they can save so they have money in their pocket, and it’s their choice what to use it for. 

For any customer who is experiencing financial difficulty, the best thing to do is call your bank as soon as possible to work through the available options or speak to a financial counsellor who provides free, independent and confidential service. 

While we can only hope we will never again see an economic shock as big as COVID in our lifetimes, I have no doubt life will continue to throw every one of us our own personal curveballs – often when we least expect it.

Having a buffer can only help in those challenging times.