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According to the latest data for residential mortgage-backed securities (RMBS) released by Moody’s Investor Services, the share of prime quality home loans that were at least 30 days in arrears (30-plus day delinquency rate) rose to 1.38 per cent in June 2023, up from 1.25 per cent recorded in March.
For non-conforming mortgages, the delinquency rate increased to 3.98 per cent in June, up from 3.84 per cent in March.
However, delinquency rates remained below the COVID-19 pandemic peak of 1.76 per cent for prime mortgages and 4.80 per cent for non-conforming mortgages.
“We expect delinquency rates will continue to rise over the rest of 2023,” Moody’s stated in its report.
“While the Reserve Bank of Australia (RBA) has paused its cycle of interest rates rises, the central bank’s steep rate hikes between May 2022 and June 2023 have considerably raised mortgage repayment costs.
“Additionally, inflation, while easing from recent peaks, remains well above the RBA’s target range at 5.2 per cent, which means borrowers have to contend with elevated consumer prices and that high interest rates will likely persist for some time.”
According to Moody’s, high interest rates and inflation have “materially reduced” the country’s household savings ratio to its lowest level since 2008 at 3.2 per cent, which acts as a hindrance to the capacity of financially vulnerable borrowers to meet mortgage repayments.
In addition, the report flagged the “considerable number” of mortgages set to roll off fixed-rates towards the end of the year, with the risk of mortgage stress rising as home owners transition to significantly higher variable rates.
“However, a large share of the outstanding RMBS we rate are by non-bank lenders, which typically have a higher proportion of variable-rate mortgages than banks,” Moody’s noted.
“Consequently, the share of fixed-rate mortgages in the pool of loans backing outstanding RMBS we rate is lower than the mortgage sector overall.”
Although mortgage delinquencies have increased, Moody’s predicted that the rise will be moderate due to Australia’s low employment rate of 3.7 per cent and recovering house prices helping alleviate risks for borrowers, in addition to lenders cutting back on risky mortgage lending over recent years.
Signs of distress among borrowers
According to the latest Pain & Gain report released by CoreLogic, the portion of home owners making short-term resales at a loss increased to 9.7 per cent in the June quarter, up from 2.7 per cent a year ago, despite Australian home resales increasing for the first time in a year.
In addition, data from Fitch Ratings suggested that the RBA’s rate hikes have increased the likelihood of mortgage arrears in 2023, which could be exacerbated by the high ratio of debt to disposable income and the dominance of floating-rate loans.
Borrowers who took out a mortgage between 2019 and 2021 when lenders tested serviceability with a 2.5 per cent buffer are more susceptible to deterioration in performance now that the buffer has increased to 3 per cent, according to Fitch.
Furthermore, credit ratings agency S&P Global Ratings (S&P) recently indicated that the peak of arrears is yet to arrive as the cumulative effect of the RBA’s rate hikes rolls through the economy.
S&P noted that many households have remained resilient to the multiple interest rate rises. According to S&P, arrears increases have been mitigated by built-up savings, improved job mobility brought on by strong growth in employment, and strong refinancing conditions.
S&P’s report revealed that prime mortgage arrears rose to 0.97 per cent in June 2023, up from the 0.95 per cent recorded in March.
This rise reflected an uptick in households migrating to advances arrears categories as they continued to adjust to rate rises.
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