Rates hikes driving home loans arrears: S&P

More and more households are falling behind on their mortgage repayments as a result of rising home loan interest rates.

S&P Global ratings reported on Tuesday a growth of five basis points in the number of home loans underlying Australian prime residential mortgage-backed securities (RMBS) in April that were in arrears, bringing the percentage to 1.21 per cent. The delinquency rate in March was 1.16 per cent.

While S&P said that “part” of the increase could be attributed to a drop in outstanding loan balances, it added that lender-introduced interest-rate rises “affected the Standard & Poor's Performance Index (SPIN) for Australian prime mortgages, given that most of the loans are variable-rate mortgages”.

The SPIN measures the rates of residential mortgage repayments more than 30 days past due in publicly and privately-rated Australian RMBS transactions.

Arrears across the country rose month-on-month, barring the ACT, Northern Territory and Tasmania.

Queensland experienced the greatest increase, with delinquency rates rising eight basis points to 1.66 per cent, while NSW followed with rates rising to 0.91 per cent in April after recording 0.85 per cent in March. In Western Australia, arrears climbed from 2.27 per cent in March to 2.32 per cent in April.

Regional banks experienced a jump in delinquency rates of 25 basis points, increasing from 2.02 per cent in March to 2.27 per cent in April. Other banks saw delinquencies rise to 1.14 per cent, up from 1.10 per cent in March. Meanwhile, non-bank lenders recorded a rise in arrears of eight basis points month-on-month, bringing the number to 0.95 per cent in April.

Pointing out that regional banks reported the “greatest increase” in delinquencies among all loan originators, S&P explained: “We attribute this in part to a decline in outstanding loan balances and the regional banks' greater exposure to Queensland; around half of all regional banks' outstanding loan balances are domiciled in the state.”

About 41 per cent of total nonconforming arrears in April was comprised of nonconforming repayments more than 90 days past due, compared with prime arrears composing 60 per cent. S&P said the ratio was “broadly consistent” in the nonconforming sector over the past decade, “but has increased more markedly in the prime sector during the period”.

Month-on-month, nonconforming arrears fell from 6.17 per cent 5.03 per cent.

S&P highlighted that a seasonally-adjusted improvement in employment rates is “credit positive” for mortgage arrears, adding that: “Relatively stable employment conditions in Australia have underpinned the low levels of arrears and losses in Australian RMBS transactions; loss of income is a key cause of mortgage default.

“Declining unemployment and positive jobs growth are fundamental to the ongoing stable collateral performance of Australian RMBS.”

[Related: Delinquency rates on the rise in 2017]

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Lucy Dean

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