Arrears plateaued in 3Q23: S&P

According to S&P Global Ratings’ (S&P) quarterly RMBS Performance Watch: Australia report for the quarter ended September 2023, Australia’s prime mortgage arrears had plateaued and have remained around long-term averages.

As cost-of-living pressures and rising interest rates continue to bite the back pockets of some households, S&P has found that “most borrowers” have remained resilient in the face of these economic headwinds, reflecting borrowers’ many options during this tightening cycle, such as savings buffers, competitive refinancing conditions, a rebound in property prices, and “some forbearance from lenders”.

As of the September quarter 2023, prime RMBS arrears were 0.92 per cent, around the long-term average of 1 per cent.

According to S&P, the string of cash rate holds during the third quarter brought a brief reprieve for borrowers, however, cash flow pressures are expected to continue for some borrowers in the lead-up to the holiday season as the Reserve Bank of Australia (RBA) has seemingly ended this extended pause.

For non-conforming borrowers, arrears rose to 3.86 per cent from 3.47 per cent, as a slowdown in refinancing activity will “add to debt serviceability pressures” for some non-conforming borrowers who are kept locked into higher rates.

“Non-conforming borrowers are more sensitive to cash flow pressures arising from higher interest rates, given their higher levels of leverage,” S&P stated.

S&P added that near-record low unemployment levels have been “fundamental” to mitigating arrears increases.

“While RMBS mortgage arrears have increased over the past 12 months, they are rising off historic lows, given the strength of many household balance sheets going into this tightening cycle,” S&P further stated.

“We don’t expect mortgage arrears, a lagging indicator, to peak until next year, given the lagged effect of monetary policy.

“Despite the difficult times ahead for some borrowers as buffers are drawn down, we expect strong employment conditions and proactive efforts by lenders to work with affected borrowers to minimise any dislocation in mortgage markets and systemic risk.”

Looking at the states and territories, the Northern Territory had the highest arrears rate at 1.87 per cent, followed by Western Australia at 1.54 per cent, Victoria (1.53 per cent), NSW (1.26 per cent), Queensland (1.01 per cent), Tasmania (0.97 per cent), South Australia (0.83 per cent), and the ACT with the lowest arrears rate at 0.70 per cent.

Arrears tracking below pre-pandemic 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”.

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