Arrears not expected to peak until 2024: S&P

Credit ratings agency S&P Global Ratings (S&P) has indicated in its RMBS Performance Watch: Australia Market Overview Report for 2Q23 that the peak of arrears is not expected until next year as the cumulative effect of the Reserve Bank of Australia’s (RBA) rate hikes rolls through.

To date, however, many households have remained resilient to the multiple interest rate rises. According to S&P, arrears increases have been mitigated by built-up savings, improved job mobility brought on by strong growth in employment, and strong refinancing conditions.

Additionally, S&P expects these strong employment conditions and “proactive efforts by lenders” are working with affected borrowers to help minimise dislocation in mortgage markets and systemic risk despite the challenging conditions approaching some borrowers.

S&P’s report revealed that prime mortgage arrears rose to 0.97 per cent in June 2023, up from the 0.95 per cent recorded in March. This rise reflected an uptick in households migrating to advances arrears categories as they continued to adjust to rate rises.

This further exacerbated the arrears situation of financially stressed borrowers, with S&P stating it expects this trend to continue over the next six months, however, is still hovering around long-term averages.

The performance in this category was supported by historically low unemployment, along with influences from competitive lending conditions, savings buffers, and property price stabilisation that has provided borrowers with “more options, and therefore greater agency” to relieve financial pressure.

Non-conforming arrears fell during this period, from 3.70 per cent in March 2023 to 3.47 per cent in June, reflecting an increase in loan balance during the quarter, which diluted arrears.

Investor arrears in the prime and non-conforming RMBS sectors were 1.07 per cent, compared to 1.44 per cent for owner-occupiers as of June 2023.

According to S&P, owner-occupier arrears are expected to continue to increase faster than investor arrears, due to the higher income profiles of investors along with their ability to offset rising mortgage repayments against strong rental price growth because of low vacancy rates.

Major bank CEO predicts a lift in arrears

Chief executive of the Commonwealth Bank of Australia (CBA), Matt Comyn, revealed in the bank’s financial results for the financial year 2023 that although arrears and hardship levels remain low, they would likely begin to climb during the new financial year.

Mr Comyn elaborated that this is because around one-third of rate increases are yet to be felt due to delays in rates being passed down.

[RELATED: A third of rate rises still to be felt: CBA CEO]