This article is from the Australian Property Journal archive
AUSTRALIA’S 30-plus day mortgage arrears rose from long-term lows in the December quarter – a seasonal trend, but one that may have been further fuelled by inflation and rising interest rates, Fitch Ratings says, which will drive up arrears in 2023.
Arrears lifted 11 basis points from the lowest levels since 2002 to 0.82%, according to Fitch’s latest Mortgage Market Index – Australia: The Dinkum RMBS Index. That figure is 10 basis points lower over a year.
“Fitch expects recent cash-rate increases by the Reserve Bank of Australia to drive up arrears in 2023, due to the high ratio of household debt to disposable income and the dominance of floating-rate loans in Australia,” said report authors Timothy Groombridge, Chris Stankovski and Natasha Vojvodic.
“Mortgages written between 2019 and 2021, when banks tested serviceability using a buffer of 2.5% above the borrower’s interest rate, are more susceptible to deterioration in performance, as the cash rate is now above this buffer.”
They said that although arrears typically increase in the fourth quarter, the rise witnessed may indicate that borrowers are beginning to face stress due to inflation and rising interest rates.
Ninety-plus day arrears were down one basis point to 0.38%.
“We expect late-stage mortgage arrears to increase in 2023, as borrowers face servicing pressure and the slowing housing market extends the time taken to sell a property,” the authors said.
The Fitch-rated RMBS Index, which includes large issuer-retained transactions, saw 30-plus day arrears increase by five basis points quarter-on-quarter to 0.61%. Fitch expects this index to continue outperforming the Dinkum RMBS Index.
The Dinkum RMBS Index borrower payment rate conditional prepayment rate (CPR) decreased to 28.2% and 26.0%, and remained below the 15-year high of late 2021. The report authors said the high repayment rates likely stem from higher refinancing activity, as cash-rate hikes drive borrowers to seek lower interest rates. Prepayment rates were below the long-term average throughout 2017 and 2018 before reaching a 20-year low of 15.7% during 2019.
“Over the past two years, CPRs for transactions issued by non-bank lenders have increased substantially above those issued by banks, most likely due to borrowers refinancing to take advantage of banks’ low fixed-interest rates.
They said the relationship between fixed and floating rates has changed, but non-bank lenders have found it hard to maintain low rates in a rising interest-rate environment, leading to more borrowers refinancing.
“Fitch expects the non-bank lenders’ prepayment rate to reduce in 2023 as interest rates stabilise and borrowers that have the ability to refinance will have already done so. However, we expect the bank lenders’ prepayment rate to increase as fixed-rate terms on loans end and borrowers seek to refinance at lower rates.”
The 30-plus day mortgage arrears for Fitch’s non-conforming index rose by 160 basis points during the quarter to 2.96%, well below the record high of early 2009 of 20.9%. Thirteen of the 14 transactions in the non-conforming index saw higher 30-plus day arrears in the recent December quarter.
“Non-conforming borrowers may be more exposed to interest rate increases as their mortgages carry higher rates and they include self-employed borrowers who take low-documentation loans,” said the authors.
Home prices across Australia’s eight capital cities decreased by 3.3% during the quarter and 6.9% year-on-year, the largest annual decline since the September quarter of 2019.
“Fitch expects home prices to continue to fall in 2023 on affordability constraints and credit tightening. However, losses from the sale of collateral property should stay low due to strong home-price growth over previous years.”
Fitch-rated RMBS transactions continue to experience “extremely low levels” of realised losses, and the excess spread was sufficient to cover principal shortfalls on all transactions in the December quarter.
