Arrears 21 bps higher year-on-year

20 September 2018

Share this article

Home loan delinquencies underlying Australia’s residential mortgages are 21 basis points higher year-on-year, and are likely to increase following out-of-cycle interest rate hikes, according to Standard & Poor’s.

According to the latest statistics form Standard & Poor’s, home loan arrears over 30 days underlying Australia’s residential mortgage-backed securities (RMBS) remained stable at 1.38 per cent in July. However, when compared year-on-year, arrears increased by 21 basis points from 1.17 per cent.

On a state-by-state basis, arrears rose sharpest in NSW over the month to July, rising by 4 basis points to 1.07 per cent.

Despite a 13 basis point drop, arrears remained highest in the Northern Territory at 2.67 per cent, closely followed by Western Australia, where arrears fell by 3 basis points to 2.63 per cent.

S&P has noted that high household indebtedness and low wage growth have increased “borrowers’ sensitivity to interest rate rises”.

The ratings agency claimed that recent out-of-cycle rate hikes from lenders, including three of the big four banks, are likely to spark a rise in arrears, but said that it does not expect the spike to be “material”.

“The majority of loans underlying Australian prime RMBS transactions are well seasoned, which means most borrowers have a demonstrated track record of repayment,” S&P stated.

“Furthermore, around 80 per cent of loans have a loan-to-value ratio [LVR] at or below 75 per cent, providing a level of buffer against softening property prices and enhancing refinancing prospects.”

However, S&P said that some borrowers, including those with higher LVRs, are “more exposed” to rising interest rates, “particularly at a time when lending standards are tightening and refinancing opportunities are diminished”.

The ratings agency added that despite such risk, Australia’s RMBS portfolios’ exposure to such borrowers is “not significant”, stating that exposure to loans with an LVR of 80 per cent is 13 per cent.

Further, despite a continued fall throughout 2018, arrears underlying Australia’s non-conforming mortgages increased month-on-month, from 3.44 per cent to 3.75 per cent.