Our big banks have cast themselves as the good guys in the battle against the coronavirus outbreak.
They’re giving money to charity, boosting pay for front-line staff and offering to work with businesses and individuals who can’t pay what they owe because of financial hardship. If you’re banking online these days, you cannot possibly have overlooked the messages about how your bank is there to help.
Credit the banks for all of this, but don’t take their good-guy persona too seriously. Even in pandemics, banks work primarily for their shareholders and not their customers.
Here’s what this means if you’re in financial trouble and need help: Whatever assistance your bank offers, ask about the cost and the terms. How much extra interest might you pay? What’s the effect on your credit rating? What if you need more help down the line? Expect some give from your bank, and also some take.
The banks came through the 2008-09 like wounded animals, snapping and scratching at their clients with new fees and higher interest costs. In the current crisis, they’ve made sure to be at the forefront of a trend we’ll call the caring corporation.
Is your e-mail in-basket filled like mine with helpful notices from your bank? Some sample subject lines from my own e-mail collection:
- “Supporting you when you need it most”
- “We’re here to help you during COVID-19”
- “We’re here to help you through this”
The same banks that sent these messages were still charging 20-per-cent interest on credit cards as of late this week, even as the federal government was asking them to lower these rates as a way to help people who are struggling financially.
Mortgage rates are another aspect of the disconnect between how banks are projecting themselves and what they’re doing. As the coronavirus outbreak hit hard and central banks slashed interest rates, homeowners began to hope that falling mortgage rates would help lighten their financial load.
Government bond yields, which usually guide mortgage rates, are half the level of late January. Mortgage rates recently ticked higher as banks priced in the heightened risk of mortgage defaults by customers.
The banks did lower some rates. For example, in the first half of March they passed on the cumulative one-percentage-point drop in the Bank of Canada’s overnight rate through to their prime rates, which in turn lowered rates on home-equity lines of credit and variable-rate mortgages (the Bank of Canada dropped the overnight rate another 0.5 of a point on Friday and the response from the big banks was pending). Back in 2015, the banks passed along only a portion of the Bank of Canada’s rate cuts.
Unfortunately, the banks also took an axe to their savings account rates. While many alternative banks and credit unions were holding the line with savings rates around 2 per cent, big bank high-interest accounts fell to 0.3 per cent in many cases.
The country was only just grasping the full extent of the coronavirus outbreak when the banks made a surprising offer to let people having financial difficulties defer mortgage payments for up to six months. These deferrals can be super helpful if you were laid off as a result of the social distancing we’re all supposed to be practising to halt the spread of the virus, or if your income has been slashed. But they’re also a lesson on the gap right now between bank PR and bank business practices.
Information on how the deferrals work is ridiculously hard to find. Are credit scores going to be negatively affected if you defer? Many observers say no, but we can’t get a definitive word from the banks.
And then there’s the question of how the deferrals actually work. One bank explains on its website that interest on your deferred payments will be “capitalized,” which means it will be added to your balance owing. You would end up paying interest on interest in this case, which inflates your total cost of borrowing.
Arguably, it’s tolerable to pay more interest in exchange for getting mortgage relief for as long as six months. But when banks are e-mailing to say they’re here to help you through this crisis, you might expect at least a touch of self-sacrifice.
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