Arrears rise as mortgage relief periods end: S&P

According to Standard & Poor’s published RMBS Performance Watch: Australia report, the level of mortgage arrears has begun to rise.

According to S&P’s Performance Index (SPIN) for Australian prime mortgages – which measures the weighted average of arrears more than 30 days past due on residential mortgage loans in publicly and privately rated Australian RMBS transactions – the arrears index increased to 1.37 per cent in December 2020, compared with 1.28 per cent in the same period a year earlier.

While the index provider said that it expects that COVID-19-related arrears will “more meaningfully surface” from the second quarter of 2021, following the expiration of mortgage deferral periods in March 2021, it noted that arrears could rise at different rates for lenders, depending on restructuring arrangements and reporting nuances.

Just 1.4 per cent of total loans outstanding ($37 billion) remained on temporary deferrals as at 31 January, according to the most recent data from the prudential regulator.

S&P added, however, that while arrears are rising, they have been tempered by low interest rates, a better-than-expected economic recovery, and strong refinancing conditions.

“Strong property market performance will also help existing borrowers by enhancing their equity positions in their homes, improving their refinancing prospects. This is a common way to self-manage out of arrears,” S&P said.

“Arrears increases have been more pronounced in inner-city areas, where rental income has contracted due to population shifts to the suburbs during COVID-19 and a decline in international migration. This could change as housing affordability pressures rise, workers return to the office, and international migration resumes.

“Higher property prices often translate to higher leverage because borrowers need to take on more debt to gain a foothold in the market. As house price growth outstrips wage growth, household-debt-to-income ratios will come under pressure. Lower interest rates will help to offset this, but the disconnect underlines the importance of prudent lending standards to ensure that debt can be serviced over the life of a loan and throughout different economic cycles,” it concluded.

The report echoes forecasts made by Moody’s last year, which also predicted a substantial rise in non-performing loans after the measure that allowed banks to treat loans subject to repayment deferrals as performing expires in March 2021.

Several groups have also been tracking mortgage stress in recent months, with Roy Morgan finding that one in five (or around 783,000) mortgage-holders were at risk of “mortgage stress” in the three months to November 2020. 

While the figures were unchanged on a year earlier in late 2019, this was up from the record lows in the middle of 2020 when only 668,000 mortgage-holders were considered “at risk” between July and September 2020.

Meanwhile, ME Bank recently found that mortgage stress (defined as making loan payments of more than 30 per cent of their disposal income) had dropped to its lowest level in three years.

[Related: Mortgage stress at 3-year lows: research]