The ratings agency has reported that arrears on residential mortgage-backed securities (RMBS) increased from 1.07 per cent in December 2017 to 1.30 per cent in January 2018.
In its report, S&P attributed the rise in arrears to the “impact of incremental increases in interest rates” in 2017 and the lingering effect of spending over the Christmas/holiday period.
S&P noted that borrowers are increasingly sensitive to interest rate movements as a result of high household indebtedness, but it stated that improving employment conditions have kept mortgage defaults low.
However, the ratings agency believes that “overall arrears could moderate” over the coming months, noting that the level of loans which “migrate” from early arrears into severe arrears would also become evident over the next few months.
Mortgage arrears of over 30 days rose in every state and territory in January, with arrears highest in Western Australia, jumping by 36 basis points from 2.08 per cent to 2.44 per cent. New South Wales, on the other hand, had the lowest level of arrears nationwide (0.98 per cent).
Further, S&P claimed that borrowers at a higher risk of entering into arrears include:
- borrowers with interest-only loans approaching the expiry of the principal-free period, which it believes could be “susceptible to payment shock”;
- borrowers with high loan-to-value ratios (LVR) because, in the event of a default, they are “more likely to find it harder to refinance their home loan with another lender”;
- borrowers with “less of a buffer” to service high debt in proportion to income, who could experience financial stress when rates rise or their economic circumstances change.