Australia rounds out top three countries "most exposed" to financial shock

Blame variable-rate mortgage lending

Australia rounds out top three countries "most exposed" to financial shock

Fitch Ratings has made its decision: Australia – alongside Spain and the UK – are the most vulnerable countries in the world to a financial shock.

The credit ratings agency released the statement as central banks raised interest rates to combat record inflation spikes, pointing out that Australia and Spain’s vulnerability stemmed from a high proportion of variable-rate mortgage lending. UK borrowers, meanwhile, have relatively high debt-to-income ratios.

Both indicate the relative exposure of residential mortgage-backed securities and covered bond markets to rising interest rates, Fitch Ratings reported.

Read more: Non-majors raise variable loan rates

Fitch stress-tested the average debt-to-income ratio for loans originated in 2020. It assumed the rates payable on variable-rate loans increased by three percentage points by the end of 2023, keeping income unchanged.

“Considering both variable and fixed-rate loans, borrowers in Australia, Spain, and the UK would experience the most significant payment shocks in our scenario, measured by the relative increase in the stressed versus original debt-to-income,” Fitch concluded.

Variable-rate loans in Australia, Spain, and the UK represent a significant portion of new loan originations, their starting debt-to-income ratio ranging between 26% (Australia) and 34% (UK). These countries appeared the most sensitive to a rise in rates as the ratios would move to 34%-39%, Fitch said.

Read more: Rate rises could impact housing market faster than usual

In March, Fitch forecast four interest rate hikes from the Bank of England in 2022, with policy rates reaching 1.75% by year-end 2023. Similar trends were forecast for Australia, where it suggested policy rates would increase to 1.25% over the same period.

Fitch has amended these projections since then, pointing out that the higher-than-expected inflation and “hawkish commentary” from central bankers since March points to strong upside risks, Morningstar first reported.

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