Mortgage arrears showing cracks: S&P

Australian prime and non-conforming home-loan arrears rose in December, according to the credit ratings agency.

The credit ratings agency S&P Global Ratings’ monthly market overview for December 2022 revealed prime mortgage arrears continued to rise to 0.76 per cent from 0.65 per cent in November.

The data also noted that December was one of the “peak months for higher arrears”, with consumer spending elevated in the lead-up to Christmas and holiday spending.

This followed a lag in mortgage arrears, with S&P’s September 2022 quarter data revealing the effect of cumulative rate rises was yet to surface in most transactions as household savings, repayment buffers, and redraw ability were helping cushion the effect of higher interest rates.

However, as borrowers absorb their savings and the Reserve Bank of Australia (RBA) continues its rate hiking cycle, with the cash rate lifting to 3.35 per cent in February, S&P expects the magnitude of arrears increases to be “greater than in recent years”.

In addition, arrears increases in December were “more pronounced than in previous years” following the 300-bp that had been passed on to borrowers since May 2022.

“Arrears are rising off historical lows and remain below long-term averages. But as interest rates continue to rise, this state of affairs is likely to change,” the report noted.

Australia’s prime home loan arrears between 31–60 days ‘lifted’ to 0.79 per cent, up from 0.73 per cent in November, however, remains at record low levels.

Arrears were higher with the major banks (1.48 per cent) compared with regional banks (1.09 per cent), non-bank originators (0.62), or non-bank institutions (0.42).

Risky loans, bigger cracks

In the non-conforming sector, arrears started rising in July 2022 with increases spread across all arrears categories.
Non-conforming arrears reached 3.20 per cent compared with 2.66 per cent a month earlier.

“Nonconforming borrowers, who are typically more highly leveraged and have larger loans, often have fewer options than prime borrowers to refinance, thereby exacerbating arrears,” the report noted.

“Arrears are likely to remain elevated for longer because nonconforming borrowers will find it more difficult to self-manage their way out of arrears.

“New borrowers continue to enter arrears and loans are transitioning from early to more advanced stages of arrears.”
Nonbank originators continue to record the largest increases in arrears among residential mortgage-backed securities (RMBS) originators, which was to be expected “given the sector’s low seasoning and therefore higher proportion of borrowers.”

[Related: Prime home loan arrears steady for now: S&P]