Mortgage arrears expected to peak next year
Despite surging interest rates and cost-of-living pressures taking a toll on some households, most borrowers appeared to be managing the conflux of financial pressures quite well, with Australian prime mortgage arrears seeing only a slight uptick during the second quarter of 2023, according to the latest S&P Global Ratings report.
S&P Global Ratings’ latest RMBS Performance Watch: Australia showed prime mortgage arrears had a modest 0.02 percentage points rise to 0.97% in three months to June from 0.95% in the first quarter of 2023. Nonconforming arrears, on the other hand, fell to 3.47% in the June quarter, from 3.7% the previous quarter, reflecting a rise in outstanding loan balances during the quarter, diluting arrears. There had been an increase in the dollar value of nonconforming loans in arrears during the quarter.
Some areas experienced a marked increase in arrears. Many households, however, have continued to be resilient to multiple rate hikes, with prime mortgage arrears still hovering around long-term averages. This result was supported by historically low unemployment, plus mitigating factors such as competitive lending conditions, savings buffers, and property price growth that provided borrowers with more options, and therefore more means, to reduce financial pressure.
“Mortgage arrears are a lagging indicator, and we do not expect them to peak until next year, when the cumulative impact of progressive interest-rate rises rolls through,” S&P Global said.
So far, arrears increases have been delayed by built-up savings and strong employment growth, which boosted job mobility. Strong refinancing conditions have also helped pull down arrears.
“Despite the difficult times ahead for some borrowers, we expect strong employment conditions and proactive efforts by lenders to work with affected borrowers to minimize any dislocation in mortgage markets and systemic risk,” S&P Global said.
RMBS Performance Watch: Australia provides a comprehensive analysis of arrears statistics on loans underlying Australian RMBS. The report, which is broken into eight parts, can be found on Ratings Direct, at https://www.capitaliq.com/.
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