Owner-occupiers at greater risk than investors: S&P

In its RMBS Arrears Statistics: Australia report, Standard and Poor’s (S&P) claimed that the 12 per cent of borrowers transitioning from an interest-only (IO) period with owner-occupier loans are more likely to struggle than investors transitioning from IO loans.  

“We believe owner-occupiers are more likely than investors to struggle with the transition to principal and interest repayments, particularly for loans underwritten before 2015 when lending standards for interest-only loans were not as stringent.

“Investors typically have a higher net wealth profile and are often in a better financial position to absorb higher repayment costs, particularly given the tax-deductible nature of interest repayments.” 

The ratings agency claimed that the heightened risk profile of owner-occupier IO borrowers is evidenced by historical arrears data.

“The historical arrears performance of investor versus owner-occupier loans attests to this, with investment loan arrears outperforming owner-occupier loan arrears for most of the past 10 years.”

Mortgage arrears drop nationwide

In its report, S&P also noted that Australian home loan arrears dropped by 14 basis points in February, after a 16 basis point rise in January.

Mortgage arrears fell from 1.30 per cent in January to 1.16 per cent in February.

The ratings agency’s analysis revealed that delinquencies dropped in all states and territories, driven by a decline in total loans outstanding.

S&P attributed the fall to stronger jobs growth across the country, making particular reference to improvements in the resource states of Queensland and Western Australia. Queensland experienced a year-on-year arrears drop of 12 basis points, from 1.65 per cent to 1.53 per cent, while arrears dropped by 5 basis points in Western Australia, from 2.32 per cent to 2.27 per cent in the same period.

“Improving conditions in the broader economy are helping to stem the flow of new loans moving into arrears, as evidenced by the more pronounced improvements in the earlier arrears categories,” the S&P report noted.

However, the ratings agency reported that loans in the most severe arrears categories are not improving.

According to S&P, loans more than 90 days in arrears reached 0.66 per cent in February, 14 basis points above the 10-year average of 0.52 per cent.

Further, the report noted that more than half of loans in arrears over 90 days are in Queensland and Western Australia, brought about by slow property price growth.

S&P claimed that such arrears are unlikely to “cure”, as a result of sluggish wage growth and the prospect of future interest rate rises. S&P added that the ability of borrowers to manage the pressures of such conditions is dependent upon their loan-to-value ratio (LVR) position and their refinancing prospects.

However, S&P reported that borrowers would absorb future interest rate hikes.

“Future interest rate rises will no doubt put pressure on some borrowers, given Australia’s high indebtedness. 

“But we believe most borrowers across Australian RMBS portfolios should be able to absorb a gradual rise in interest rates and continue to pay down their mortgage, provided jobs growth continues and economic conditions remain relatively benign.”

Earlier this month, however, Moody’s released its RMBS Australia: Mortgage delinquency map, wherein it noted that it expects mortgage arrears to rise in 2018, driven by slowed property market conditions in Sydney and Melbourne.

“[We] expect [mortgage arrears] will rise this year as the housing market softens,” Moody’s vice president and senior analyst Alena Chen said.

[Related: Mortgage delinquencies set to rise: Moody’s]