New borrowers have ‘far lower’ resilience to rate hikes

According to a recent survey conducted by UBS, new borrowers, who are considered more vulnerable, are displaying reduced capacity compared to previous surveys when it comes to enduring additional interest rate hikes or cost-of-living pressures.

The survey, which included 805 Australians who had obtained a mortgage within the past six months to purchase a property, highlighted that this particular group appears to have a “far lower capacity to withstand further interest rate hikes”.

It should be noted that the survey conducted between 2 February and 6 March, focused solely on customers who purchased properties and excluded those who refinanced.

Although the data indicated a decrease in the percentage of borrowers missing mortgage payments (10 per cent in March 2023 compared to 20 per cent in March 2022), the overall impact of interest rate hikes is testing the resilience of new borrowers.

The survey revealed that only 38 per cent of respondents were more than three months ahead on their mortgage payments, down from 51 per cent in August 2022.

On top of being less ahead on mortgage payments, many consumers are now starting to draw down on savings buffers, with 29 per cent of survey respondents stating that their emergency funds could cover expenses for only up to two months, signalling increased financial strain.

Overall, the survey suggests that the rising cost of living and the sharp increase in the cash rate are beginning to impact the ability of new borrowers to service their mortgages.

Five out of the seven stress metrics measured in the survey have shown deterioration, with a higher percentage of clients resorting to interest-only loans to alleviate payment stress.

Additionally, fewer borrowers are ahead on their mortgage payments and only 39 per cent are managing their finances with ease.

These findings align with research conducted by Roy Morgan, which revealed that the number of Australians “At Risk” of mortgage stress has increased by 529,000 over the past year, coinciding with the consistent interest rate hikes implemented by the Reserve Bank of Australia (RBA).

Looking ahead, stress is anticipated to further emerge over the next six months, as the existing cohort of mortgage borrowers has already exhausted the interest rate serviceability buffers established at the beginning of the cycle.

This situation raises concerns about the potential impact on retail credit loss ratios, which could revert to long-term averages or potentially even higher levels, the report warned.

Fixed-rate cliff is here

Another significant development in the Australian banking sector is the gradual expiration of fixed-rate mortgages, expiring over the next few weeks onto much higher revert rates.

The report revealed the phenomenon is expected to result in two main consequences: increased competition driven by discounting on both existing and new business as well as potential asset quality issues when customers’ mortgage rates reset.

However, the full impact of these fixed-rate resets on the broader economy has yet to be realized.

Considering the challenging times ahead, the survey emphasised the crucial role played by distribution brokers for banks.

Among the surveyed respondents, 70–80 per cent of mortgage business is conducted through the broker channel.

Notably, Macquarie Bank represented 97 per cent of its mortgage business derived from brokers, followed by ANZ at 88 per cent.

Other major banks such as Bank of Queensland, Commonwealth Bank (CBA), Westpac, National Australia Bank, and Bendigo also reported significant reliance on the third-party channel for their mortgage books, ranging from 68 per cent to 79 per cent.