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These themes were discussed by director of structured finance at S&P Global Ratings, Erin Kitson, who said that while we have seen slight increases in the number of arrears, there are factors at play that are keeping figures in check.
“Mortgage arrears have been steadily increasing, albeit off very low levels, but I think the increases have certainly been modest. What’s helped to underpin that stability that we’ve seen, despite the rapid interest rate rises, has been low unemployment. That’s been fundamental to keeping arrears low,” she said.
“But I think other things that have helped overall has been the refinancing market environment. Refinancing conditions have tempered a little bit, but that’s certainly been an avenue that’s helped borrowers alleviate debt serviceability pressures by being able to take advantage, for those that could, of a better mortgage rate.”
Refinancing can be a lifeline for those struggling to keep up with mortgage repayments and is a suitable first step for those struggling to keep up.
“Refinancing is a first order step, rather than having to go down and voluntarily sell a property, which is clearly a much bigger deal. And I think the competitive refinancing environment that you’ve seen has probably seen that avenue used quite a bit in this tightening cycle,” said Kitson.
“For many households, that would be a common first step to try and alleviate mortgages, just outside of things like cutting discretionary expenditures and so forth. But being able to refinance onto a cheaper home loan doesn’t require as much personal sacrifice compared to cutting back on lots of other expenses.”
Switching lenders can help find a more competitive rate, which Kitson said is helping Aussies stay afloat amid economic turbulence.
“If you have a look at the refinancing statistics, you can see that the levels of refinancing loans have peaked. I think they’re coming off their peaks now, but they really jumped up quite a lot, particularly last year,” Kitson said.
“There was just a number of banks in that space trying to build market share by offering products that were offering rates that were very desirable to a number of borrowers, given the significant increases in their mortgage repayments.”
Further to the rise in refinancing, an uptick in property prices is making life easier for those who already own property.
“The other thing that has helped has been the rising property price environment. That’s helped in a couple of ways on the arrears front. First, strong property markets, rising property price markets increase borrowers’ equity in their homes, and that helps refinancing,” Kitson said.
“Lenders generally look more favourably upon modest loan-to-value ratios in refinancing applications, and that’s more likely to happen in a rising property price environment. So, I think that the property price situation that we’ve seen has also been another factor helping to keep arrears low overall.”
The power of a helping hand should not be understated. This was made apparent during the pandemic, where initially arrears increased dramatically, said Kitson. In the following months however, government and bank incentives took effect and actually saw a decrease in mortgage arrears.
“Initially in COVID-19 you saw arrears increases, but then you had your mortgage deferrals where the banks were providing borrowers with a mortgage deferral period. And that obviously saw arrears plateau and come right down. And then off the back of that, you had a lot of stimulus being offered, and then you had the Reserve Bank of Australia cutting rates pretty quickly to help stimulate the economy,” said Kitson.
“So, you saw an initial spike at the very onset of COVID-19 in all the uncertainty, particularly if you had to rely on part-time income. But once all the stimulus came online, the mortgage deferrals were on offer, helping borrowers, just giving them time to get back on financial track. And mortgage arrears actually reached their lowest point.”
When breaking down trends by geographical location, Kitson said that there are persistent trends. For example, areas with high house prices and falling incomes will see an increase in arrears.
“When we look through our arrears statistics and we start to have a look at what areas they’re higher, you can see higher arrears levels and more pronounced increases in areas like northwest Melbourne or northeast Melbourne and southwest of Sydney areas where borrowers have to move further out of the city to be able to afford a property in the first place,” said Kitson.
“But particularly in those cities where you’ve got a much bigger gap between a borrower’s income and the property prices, that means that they’re going to have to probably take on more leverage and that makes the borrower more susceptible to falling into arrears in a rising interest rate environment.”
[Related: What’s causing arrears to rise?]
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