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Prime residential mortgage-backed securities (RMBS) have increased by 7 basis points, from 1.00 per cent in November to 1.07 per cent in December, rising for the first time since July 2017.
The ratings agency has reported that the spike was driven by poor performances in the resource states of Queensland and Western Australia, which made up 60 per cent of arrears nationwide.
The resource states were also home to over half of home loans in the “severe arrears” category of over 90 days overdue.
However, mortgage arrears have fallen by 7 per cent year-on-year, with fewer home loans falling into arrears in most states.
S&P has attributed the drop to improving employment conditions and continually low interest rates, but it has warned that slow wage growth and high levels of household indebtedness could expose borrowers to sensitivities in the financial system.
The ratings agency expects mortgage arrears to rise following an eventual interest rate hike, but it does not forecast an increase in mortgage defaults, noting that 70 per cent of mortgage holders are owner-occupiers with “well-seasoned” loans.
“[We] believe that while arrears are likely to increase in the face of a gradual rise in interest rates, given that most mortgages are variable rate, this is unlikely to lead to higher defaults or rating downgrades, provided that employment conditions remain stable,” S&P noted.
“[We] expect that a rise in interest rates would be more likely to cause borrowers to adjust their spending patterns to avoid falling behind on their mortgage repayments.
“This could influence leading indicators of financial stress, as measured by various household surveys or consumption growth, but we believe it is unlikely to translate into higher defaults at a national level.”
[Related: Mortgage arrears fall in November]
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