Refinancing difficulties affecting mortgage payments: Fitch

According to Fitch Ratings’ Dinkum RMBS Index, the borrower payment rate (BPR) decreased by 10 basis points to 20.7 per cent by the end of the first quarter of 2018 (1Q18), with the conditional prepayment rate (CPR) also falling, dropping by 11 basis points to 18.4 per cent.

Fitch noted that the conditional prepayment rate remained low throughout 2017 and 1Q18, the longest period the CPR has remained below 20 per cent.

The ratings agency attributed the decline in the CPR to tighter underwriting standards and macro-prudential measures imposed by the Australian Prudential Regulation Authority (APRA), which it claimed have limited access to mortgage refinancing.

“The slowing prepayment rates reflect the increased difficulties of refinancing due to a combination of tighter underwriting standards and APRA’s directive to restrict annual interest-only loan growth to 30 per cent and annual investment loan growth to 10 per cent,” Fitch noted.

Fitch also said that it expects the CPR to remain below 20 per cent throughout 2018.

Speaking to Mortgage Business, director of structured finance at Fitch Ratings Australia Chris Stankovski said that reduced access to refinancing would most impact borrowers that had a high-risk profile when they initially obtained a loan.

“The borrowers that might have more of an issue are those who obtained lending to the limits of the lending capacity a couple of years ago and are looking to refinance without getting ahead of their payments or without building additional income,” the director said.

“The marginal lender would find it more difficult to refinance their loan, and that’s why we expect [the CPR] to remain low.”

When asked if he expects the trend to continue in the longer term, Mr Stankovski noted that Fitch would observe market conditions following the conclusion of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry before making a determination.

“It’s difficult to determine whether refinancing rates will remain low in the long term, so we’re interested to see the recommendations from the banking royal commission later this year and the impact those recommendations have on underwriting standards,” Mr Stankovski said.

“We think that at the very least, these current underwriting standards will remain, with the potential for additional tightening following the recommendations from the banking royal commission.”

Moreover, Fitch reported a seasonal increase in mortgage arrears over 30 days, rising by 12 basis points to 1.13 per cent in 1Q18.

The ratings agency noted that arrears are sensitive to household debt and could increase if interest rates rise.

“Fitch expects arrears to become more sensitive to rising borrowing or unemployment rates due to high household indebtedness, which has accelerated significantly over the previous three to four years,” Fitch noted.

“Rising interest rates will stress highly indebted borrowers due to climbing loan repayments, increasing the likelihood of borrowers falling in arrears.”

Fitch also reported a drop in the annualised loss rate, with the percentage of mortgage defaults in proportion to the overall balance dropping to 0.02 of a percentage point, well below the peak of 0.09 of a percentage point.

“Fitch expects the loss rate to remain low throughout 2018, as we forecast the Reserve Bank of Australia (RBA) to keep the cash rate unchanged at 1.5 per cent.”

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