As property market softens, arrears are expected to rise. Who will be most affected?

Two ratings agencies say borrowers in regional areas are already feeling the pinch. But capital cities won't be immune

As property market softens, arrears are expected to rise. Who will be most affected?

Mortgage delinquencies have remained broadly stable over the year, but are expected to increase moderately as a result of the property market slowdown, according to Moody’s Investors Service.

While the agency said it expected only a slight uptick in arrears over the coming year, it projected that NSW and Victoria would be the most affected, largely because of high household leverage in these states and the impact of interest-only loans switching to P&I repayments.

Keeping arrears contained, however, is completely reliant on solid macroeconomic conditions. If there is strong job growth and stable employment, borrowers will be more able to make their repayments.

It found that the proportion of residential mortgages that were more than 30 days in arrears was 1.58% in May 2018, compared to 1.62% in May 2017. As expected, delinquency rates were lower in capital cities. The most affected regions were Western Australia and Queensland, where borrowers have suffered from a lack of mining and resource-related jobs and drought.

However, another ratings agency, S&P, struck a more cautionary tone in its latest arrears report. It found that “there has been an ongoing increase in home loans that are more than 90 days in arrears”, which it defines as advanced.

“Loans more than 90 days past due reached 0.74% in August, making up around 54% of total arrears. This is up from 42% five years ago.”

The regional bank mortgage originators reported the highest percentage of loans in arrears in August, at 1.33%, followed by the major banks, at 0.99%. This heightened pressure regionally echoes Moody’s findings.

To re-cap, the number of loans in the “advanced stages of arrears” has to do with geographic pressures, repayment shock from the IO loan transition, general mortgage stress, and out-of-cycle rate rises, S&P said.

Likewise, the agency said it expected falling house prices to put further pressure on mortgage arrears in coming months, especially among borrowers with higher loan-to-value rations who haven’t had time to build up equity or accumulate mortgage buffers.

“This could tip some borrowers into a negative equity position, which would significantly impede their refinancing prospects in the current lending environment. Across all RMBS loan portfolios we expect borrowers with LTV ratios of 80% and higher to be most at risk. These loans account for around 13% of RMBS loan portfolios,” S&P said.