Arrears still tracking below pre-COVID-19 levels

According to the findings released by Perpetual Corporate Trust’s report, Emerging Opportunities: An in-depth assessment of Whole Loan Sales in Australia, bank and non-bank 90-plus day arrears increased by 0.17 bps to 0.57 per cent of current balances in 2023 as of 31 August 2023.

However, the report found that while arrears have ticked up over the year, they still remain “well below” the 0.69 per cent average prior to the pandemic between 2016 and 2021.

Furthermore, the report found that non-bank 90-plus day arrears increased from 0.31 per cent to 0.76 per cent, while for banks, this figure increased from 0.43 per cent to 0.57 per cent.

According to Perpetual, this increase was more pronounced in non-prime loans, however, the recent rise in arrears for these loans has placed them back to pre-pandemic levels and “well below GFC levels”.

Perpetual Corporate Trust chief executive Richard McCarthy said: “With the recent surge in the Reserve Bank of Australia (RBA) cash rate, which has seen the Reserve Bank raise interest rates 13 times since May 2022, there has been considerable public attention given to borrowers’ ability to adjust to higher mortgage repayments and the impending ‘mortgage cliff' as borrowers roll off low fixed rate mortgages.

“Despite the negative sentiment, analysis of the RMBS market from our data warehouse shows that arrears performance across the RMBS sector has been better than perhaps many had expected.

“The recent rise in 90+ DPD (days past due) arrears needs to be taken in the context of coming from an extremely low base, where arrears had dropped more than 30 per cent between December 2021 and December 2022, reflecting the ultra-low interest rate environment.”

Rate hikes effecting arrears

Earlier this year, data from Fitch Ratings (Fitch) suggested that the RBA cash rate hikes increased the likelihood of mortgage arrears in 2023, which could be made worse by the high ratio of debt to disposable income and the dominance of floating-rate loans.

Borrowers who took out a mortgage between 2019 and 2021, when lenders tested serviceability with a 2.5 per cent buffer are more susceptible to deterioration in performance now that the buffer has increased to 3 per cent, according to Fitch.

The country’s 30-plus day mortgage arrears rose to 1.07 per cent quarter on quarter in 2Q23, increasing from the lowest levels in over two decades.

Fitch believes this increase may be indicating that borrowers are distressed due to rising interest rates and inflation, although delinquencies appear to be stabilising as early-stage arrears remain unchanged quarter on quarter despite this rise in 30-plus day arrears.

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