Arrears steady amid rising rates
Australian prime mortgage arrears showed resilience in the third quarter, at 0.92% in the three months to September, around their long-term average of 1%, with most borrowers weathering the impact of increased interest rates and cost-of-living pressures, according to S&P Global Ratings.
Weathering economic tightening
S&P Global Ratings’ latest report, RMBS Performance Watch: Australia, suggested that various factors, including savings buffers, favorable refinancing conditions, property value upticks, and lender forbearance, contribute to borrower’' ability to navigate the tightening economic cycle.
Despite the rise in RMBS mortgage arrears over the last 12 months, they are coming from historically low levels, underscoring the resilience of household balance sheets entering this period of economic tightening. Low unemployment has played a crucial role in mitigating the growth of arrears.
Nonconforming arrears on the rise
Over the September quarter, nonconforming arrears rose to 3.86% from 3.47% the previous quarter.
“Nonconforming borrowers are more sensitive to cash-flow pressures arising from higher interest rates, given their higher levels of leverage,” said Erin Kitson (pictured above), S&P Global primary analyst of sector specialist research. “A slowdown in refinancing activity will also add to debt serviceability pressures for some nonconforming borrowers by keeping them locked into higher rates.”
Anticipated cash flow pressures
S&P Global noted that while the temporary halt in cash rate increases during the third quarter offered a brief respite for borrowers, cash-flow pressures are anticipated to intensify with the conclusion of the pause, particularly in the approach to the Christmas season.
“We don’t expect mortgage arrears, a lagging indicator, to peak until next year, given the lagged effect of monetary policy,” Kitson said.
“Despite the difficult times ahead for some borrowers as buffers are drawn down, we expect strong employment conditions and proactive efforts by lenders to work with affected borrowers to minimise any dislocation in mortgage markets and systemic risk.”
For a detailed analysis of arrears statistics on loans underlying Australian RMBS, the complete report, RMBS Performance Watch: Australia, is accessible on RatingsDirect.
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