ex gratia

The interest free snowball

March 24, 2023

The avalanche coming for ratepayers in 2022 and beyond

The COVID pandemic and successive lockdowns brought immense financial hardship to ratepayers around Australia. According to the Victorian Ombudsman Report (May 2021), one in ten Victorians were already facing financial difficulties prior to the COVID-19 outbreak - and this  almost doubled after the first series of lockdowns.

Many local governments responded rapidly with ‘pandemic assistance’ packages. Some councils issued direct relief or rebates, but the preferred method of support (adopted by 56 councils in Victoria alone) was to offer interest deferrals on outstanding rates.

Deferring interest seemed like a charitable move. In effect, it extends the time that someone has to pay their rates, without any up-front financial penalty like interest.

However, there are unintended consequences of this approach that will shortly start to appear. In fact, I'm concerned that this policy decision may actually make things worse for many ratepayers doing it tough, potentially fostering financial instability in some of Australia’s largest councils.

Let me explain

Imagine Tony, a resident under financial hardship, who applies for and is granted a rate deferment of $1400 for 12 months.

12 months later (which for many Australians in this position will be January next year), Tony will be required to pay one quarter worth of new rates plus the deferred amount outstanding from last year.

Assuming no rate increases take place, this shifts the effective total due from Tony at this time from $350 to $1750.

Do you think that Tony is prepared for this payment?

And even for councils who think ahead of this problem, and pre-emptively divide the deferred amount into quarterly instalments, the total due is still double what it would have been in the previous year - at $700 instead of $350.

Unfortunately, I foresee a spike in the amount of Aussies who will simply go further and further into arrears. Within a given community this may snowball - I expect we’ll see councils challenged by budgetary deficits, increased costs and an administrative dilemma to attend to, as well as a sharp drop in resident satisfaction.

Moreover, if councils choose debt collection as their method to recover these funds, not only will they be out of pocket after fees & charges, but they’ll further contribute to the stress and anxiety experienced by these ratepayers.

The good news is that there’s an underutilised alternative to solve all of the above - flexible payments.

Flexible payments give ratepayers and councils a manageable alternative to the “interest free snowball” by providing weekly, fortnightly or monthly payment options to council rates that are most often charged annually or quarterly.

Rather than receiving no money for up to 12 months, councils can begin to receive a dependable cashflow now, with consumers also aware that they are addressing their bills with a figure which is more manageable.

What do you think?

Do you think the “interest-free snowball” will present a challenge to ratepayers & council policymakers in 2021?

Let us know your thoughts.

In the meantime you can see if your ratepayers are in a position of hardship by using Payble’s new Insights tool - reach out to me if you’re interested in a preview.

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