Home loans in arrears fall unexpectedly

The report RMBS Arrears Statistics: Australia by S&P Global Ratings found that the number of delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS) fell to 1.23 per cent in February from 1.29 per cent in January.

According to S&P, the results were surprising as it normally expects arrears to increase month-on-month in February, reflecting the seasonal effects of Christmas spending and summer holidays, and particularly at a time of rising interest rates.

“The month-on-month decline in arrears in February could mean that some of the rise in arrears in January was partly due to the timing of mortgage-rate increases; the weighted-average variable rate increased for a number of more recent transactions in January,” S&P explained.

“Mortgage-rate increases can create an initial spike in arrears when first applied, particularly if they are introduced when more borrowers are likely to be on holidays. This might account for part of the increase we observed in January.”

The report shows mortgages 31 to 60 days in arrears recorded the greatest improvement in February after recording the largest increase in January. The major banks recorded the largest decline in mortgages 31 to 60 days in arrears.

Further, outstanding loan balances originated by major banks make up more than half of total RMBS loans outstanding, and their arrears performance has a significant influence on the Standard & Poor Performance Index (SPIN) for Australian prime mortgages.

“Several lenders’ recently announced interest-rate increases will continue to take effect in coming months,” S&P said. “We expect this to put further pressure on the SPIN. The borrowers most vulnerable to interest-rate rises are those with higher loan-to-value (LTV) ratios and less favourable refinancing prospects, particularly borrowers with low-documentation and nonconforming loans.”

Arrears in February remained unchanged in Queensland at 1.65 per cent, and rose in the ACT to 0.81 per cent from 0.78 per cent in January and in Tasmania to 1.51 per cent from 1.47 per cent a month earlier. Arrears declined in all other states.

Loans in Victoria and NSW make up more than 54 per cent of the total loans outstanding that underlie Australian RMBS transactions, meaning that the arrears performance of the two states has a large influence on the SPIN. Both states recorded a month-on-month decline in arrears in February, despite a decline in total loan balances outstanding during the month.

[Related: Home loan arrears climb 19% year-on-year]