High interest rates and inflation will continue to spur arrears, Moody's warns
Mortgage delinquencies in Australia are set to rise due to high interest rates and inflation, despite the Reserve Bank's decision to keep the cash rate unchanged, according to a new report from Moody’s Investors Service.
According to the report, released on Wednesday, borrowers who opted for fixed-rate mortgages prior to the Reserve Bank's rate increases starting in May of last year are particularly vulnerable.
The report, which analysed data on residential mortgage-backed securities rated by Moody's, highlighted an increase in Australian mortgage delinquency rates during the March quarter and predicted further escalation in the future, according to The Australian.
Moody's expects delinquencies to continue rising over the next 12 months, attributing this trend to the combination of high interest rates and inflation. The report specifically identified borrowers who secured mortgages at very low interest rates before the Reserve Bank's monetary tightening cycle as posing a significant risk.
A key concern outlined in the report is the expiration of fixed-rate mortgages within the next year, which will compound risks as borrowers transition into home loans with substantially higher interest rates, The Australian reported. This transition, coupled with inflation, will further erode borrowers' ability to meet their loan repayments.
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Recent data on residential mortgage-backed securities rated by Moody's revealed an increase in the proportion of prime quality home loans at least 30 days in arrears, rising from 1.05% in December to 1.26% in March. Non-conforming mortgages, which are loans extended to borrowers with adverse credit histories or with income verification through "truncated means," experienced an even greater surge in delinquency rates, climbing from 3.35% in December to 4.04% in March.
Although current delinquency rates remain below the peak levels observed during the pandemic, with 1.76% for prime mortgages and 4.8% for non-conforming home loans, Moody's expected these rates to increase following the Reserve Bank's cumulative rate hikes of four percentage points since May of 2022.
The report said that Australia's low unemployment rate, standing at 3.6% in May, should somewhat mitigate the rise in mortgage delinquencies, according to The Australian. Additionally, lenders have significantly reduced their exposure to risky mortgage lending in recent years, which will help mitigate risks amid the current environment of high interest rates and inflation.
Looming mortgage cliff
The report also highlighted the surge in fixed-rate mortgage lending during the COVID-19 pandemic, which rose from an average of around 20% of outstanding housing credit in Australia before 2020 to a peak of 46% of total monthly housing loan commitments in July 2021.
Many borrowers took advantage of the low interest rates offered during the pandemic and opted for fixed mortgages, usually with terms of three years or less. However, as the fixed-rate term for a significant portion of these home loans expires within the next six to 12 months, borrowers will face the challenge of transitioning into mortgages with substantially higher interest rates, exacerbating the risk of delinquencies.
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