Property price growth and stable prepayments also support RMBS performance
Mortgage arrears in Australia’s residential mortgage-backed securities (RMBS) market are showing signs of stabilisation, according to S&P Global Ratings’ latest RMBS Performance Watch: Australia.
The report attributes this trend to borrowers adapting to higher interest rates, supported by factors such as property price growth and prudent financial behaviour.
Prime RMBS arrears decreased to 0.90% in the third quarter, down from 0.95% in the previous quarter. Nonconforming arrears also saw a slight decline, falling to 4.01% in Q3 from 4.04% in Q2.
S&P noted that while nonconforming arrears are steady overall, their performance varies by transaction. Property price increases are helping financially stressed borrowers reduce mortgage stress by enabling loan restructures or sales.
Investor arrears were significantly lower than those of owner-occupiers, sitting at 0.71% in Q3 compared to 1.02% for owner-occupiers. The report suggests that investors are somewhat shielded from repayment pressures, as rental income can offset higher mortgage costs.
Prepayment rates rose for both prime and nonconforming RMBS transactions during Q3. S&P expects these rates to increase further when interest rates are reduced, likely in 2025, which could stimulate refinancing activity.
In terms of loss exposure, prime RMBS loans with loan-to-value (LTV) ratios above 80% account for just 6% of the sector, while nonconforming RMBS has a higher exposure at 9%. These modest levels, coupled with rising property prices, are expected to limit losses in cases of borrower default.
S&P Global Ratings credit analyst Erin Kitson (pictured above) noted that arrears trends vary across the country.
“Year-on-year arrears increases are higher in Victoria compared with most other states, where arrears are stabilizing,” she said. “Improvements in arrears are most pronounced in Western Australia and Queensland, thanks to more vibrant local economies and stronger property price growth.”
Kitson also pointed out that while rising unemployment could add to repayment pressures, the anticipated interest rate cuts in 2025 will act as a counterbalance.
“This will moderate increases in arrears, provided unemployment remains low overall,” she said.
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