Home loan arrears largely untouched by COVID: S&P

Three months after the formal expiration of the first round of mortgage deferrals brought on by COVID, S&P Global Ratings has reported the results are better than expected.

As outlined in S&P’s RMBS Performance Watch: Australia report, Standard & Poor’s performance index for Aussie prime mortgages fell to 0.9 per cent in June, from 1.15 per cent a year prior.

A number of banks in the current reporting season have conveyed that the current levels of mortgage deferrals are not significant and are much lower than the levels seen in the May to June peak in 2020.

Meanwhile, non-conforming arrears past 30 days overdue sat at 3.05 per cent at June 2021.

Borrowers have been able to build up repayment buffers, cure prior arrears positions and stay on top of their repayments, S&P observed, with strong household balance sheets bolstered by government stimulus measures and low-interest rates.

Rising property prices have also enhanced refinancing options for borrowers, by boosting equity positions in their home loans.

Australian Bureau of Statistics data released on Thursday revealed that refinancing reached a high in July, with loan commitments rising 60 per cent year-on-year to $17 billion.

S&P reported refinancing has become a common way for borrowers to self-manage their way out of arrears.

While some borrowers transitioned from the first round of deferrals to formal hardship programs in the second quarter, S&P said there had not been a noticeable effect on overall prime RMBS arrears performance as low-interest rates shielded most customers from entering into arrears.

However, the lockdowns gripping NSW and Victoria are expected to crimp economic activity, with many businesses shuttered.

Self-employed borrowers in affected sectors, who are more sensitive to cash-flow pressures compared to full-time, pay-as-you-go employees, are tipped to be more strained – which will have a knock-on effect for specialist lenders.

Driven by higher refinancing rates than prime borrowers, non-conforming prepayment rates hit a high, rising to 31.2 per cent in the second quarter, compared to 25.2 per cent in Q1. Non-conforming prepayments had not climbed above 31 per cent since September 2015.

In contrast, prime prepayment rates sat at 21.6 per cent in Q2, slightly rising from 20 per cent in Q1. Many prime borrowers are expected to cut their spending and build up their savings during lockdown, which will allow them to stay on top of mortgage repayments, despite a deterioration in conditions.

However, refinancing for self-employed borrowers in non-conforming transactions is tipped to be more constrained in the coming months, given the Sydney and Melbourne lockdowns – which S&P stated may dampen prepayment rates.

The lockdowns are also expected to raise job losses, with S&P forecasting an average 5.3 per cent unemployment rate for 2021, before shifting to 4.8 per cent in 2022.

“While current lockdowns will affect GDP growth and jobs in the third quarter, we expect these effects to be temporary,” the report noted.

“We forecast economic and employment conditions [will] begin recovering once restrictions are removed.”

[Related: Monthly house price rise lowest since January]