Over the third quarter, Australian prime mortgage arrears have remained resilient despite the successive interest rate hikes, with 65% of these increases havin been passed through to outstanding variable-rate mortgages, although their effect has not yet fully surfaced due to the lagging effect of OCR rises, S&P Global said.
According to S&P Global Ratings’ “RMBS Performance Watch: Australia” report, nonconforming residential mortgage loan arrears have been climbing month-on-month since the July reporting period.
“We expected these arrears to rise before those in the prime RMBS sector,” the ratings agency said. “And we expect the rate of increases to be more pronounced, given the sector's higher exposure to borrowers who’re more sensitive to rising interest rates. The sector’s lower seasoning also means loans have not paid down to the same degree, and less equity has been built up than in the prime RMBS sector. This will affect some borrowers’ ability to refinance.”
The arrears cycle usually peaks at the end of the Christmas and summer holiday period and that the level of arrears increases at this time should help them determine the degree of mortgage stress out there, S&P Global said.
“So far, it has been delayed by factors such as lags in borrower-rate increases, a buildup of household savings, and a strong labor market,” the agency said. “Property price declines will hurt some borrowers’ refinancing prospects, which will affect arrears. Borrowers who bought at the peak of the property cycle in areas where property price declines have been more pronounced, at higher levels of leverage, will be more exposed to rising loan-to-value (LTV) ratios. Because lenders look more favorably on modest LTV ratios when refinancing loans, it could diminish some borrowers’ refinancing prospects.
“Refinancing is a common way for borrowers to self-manage their way out of potential mortgage stress. Such borrowers might also be less likely to benefit from refinancing onto a more competitive mortgage rate, thereby adding to debt-serviceability pressures. While the broader RMBS sector's aggregate exposure to borrowers with higher LTV ratios is insignificant, it varies by transaction. More recent transaction vintages are more exposed to this risk.”
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