Arrears spike to continue as rates rise: S&P

According to the latest research from Standard & Poor’s (S&P), arrears underlying Australia’s prime residential mortgage-backed securities (RMBS) have risen to 1.38 per cent as of the end of the June quarter of 2018, 1 basis point higher than the 2018 average of 1.37 per cent.

The ratings agency has noted that it believes arrears are set to rise further, citing falling home values, rising interest rates and refinancing difficulties, but it expects the increase to be “modest”.

“While our expectation is for arrears to continue to increase, given softening property prices, rising interest rates and tougher refinancing conditions, we expect the increase to be modest,” S&P said.

S&P also stated that it expects refinancing “headwinds” to ease as lenders compete for low-risk owner-occupier borrowers.

“Offsetting these headwinds is improved refinancing prospects for many borrowers as lenders continue to compete for borrowers of a good credit quality.

“Around 70 per cent of loans in the RMBS sector are to owner-occupiers, 80 per cent of loans are principal and interest loans, and around 72 per cent of loans have a loan-to-value ratio of 75 per cent or less.

“Credit collateral is therefore relatively strong and likely to weather some deterioration in key macroeconomic variables.”

However, the ratings agency has also reported a drop in repayment rates, which it said could be attributable to growth in interest-only lending over recent years, refinancing pressures for some borrowers and the growth in loan offset facilities.

S&P added that a slowing in prepayment rates could precipitate a rise in arrears if it “reflects a slowdown in refinancing activity, a common way for borrowers to manage their way out of financial difficulty”, but noted that “borrowers of a lower credit quality are more susceptible to this risk”.

S&P concluded: “We will continue to monitor this trend, but we do not expect this slowdown to cause any rating pressure in portfolios in the next 12 months.”

 [Related: Mortgage delinquencies rise as IO loans convert to P&I]