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S&P flags risks of reduced access to refinancing

S&P flags risks of reduced access to refinancing

The ratings agency has warned that a further tightening in lending standards could limit borrowers’ ability to reduce financial stress by refinancing their home loan.

In its RMBS Arrears Statistics: Australia report, Standard & Poor’s (S&P) noted that it expects lending standards to tighten further in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, warning that such tightening could affect house prices and restrict access to loan refinancing, typically used to reduce financial stress.

“We expect lending standards for residential mortgages to continue to tighten, in the wake of the royal commission. While this will help to contain the growth in household indebtedness, it could affect credit growth and home prices,” S&P stated.

“A slowdown in credit growth is also likely to affect refinancing prospects, which is a common way for borrowers to self-manage their way out of financial stress.”

The ratings agency added that clients with high loan-to-value ratios (LVR) and interest-only borrowers are more likely to face tougher refinancing prospects.

However, S&P noted that it does not expect limited access to refinancing to “create material pressure” on mortgage arrears.

“The Australian RMBS sector has an exposure of around 15 per cent to loans with higher loan-to-value ratios and around 22 per cent to those that are interest-only.

“We believe a slowdown in lending growth is unlikely to create material pressure on mortgage arrears in the next 12 months however, given the high seasoning and resulting build-up in equity of many of the loans.”

The S&P report revealed that in March, mortgage arrears rose by 2 basis points, from 1.16 per cent in February, to 1.18 per cent, following a 14 basis point drop from 1.30 per cent in January.

The ratings agency observed that while arrears remain below the decade-long March average of 1.31 per cent, mortgage repayments over 90 days due, which make up 60 per cent of total loans in arrears, are 26 per cent higher than a decade earlier (34 per cent).

On a state-by-state basis, loan delinquencies fell in New South Wales, Queensland, South Australia and the Australian Capital Territory.

S&P noted that mortgage arrears in South Australia “appear to have turned a corner”, with the state’s March 2018 arrears of 1.35 per cent 46 basis points lower than the peak of 1.81 per cent in January 2017.

“This reflects a general improvement in economic conditions in South Australia, in line with national trends,” S&P noted.

However, Western Australia remained the state with the nation’s highest arrears, with a delinquency rate of 2.37 per cent in March.

[Related: Bank tightening could result in ‘credit crunch’]

S&P flags risks of reduced access to refinancing
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