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Most Australian borrowers can absorb a gradual increase in interest rates given their demonstrated repayment histories, said S&P Global, noting that most loans underlying residential mortgage-backed securities portfolios are well seasoned.
Performance observations from amortising residential loans also display a very predictable loss curve, with the majority of losses realised within the first five years, said S&P Global analyst Erin Kitson.
"This is particularly the case for amortising loans where borrowers continue to build up equity in their homes, enhancing their LTV position," said Kitson.
She told Australian Broker that borrowers with seasoned, amortising loans are more likely to be able to absorb a gradual rise in interest rates because they have established a pattern of paying down their debt.
S&P Global expects most borrowers in RMBS portfolios -- more than 70% of whom are owner-occupiers -- to cut back on other discretionary spending to avoid going into arrears on their repayments when interest rates rise.
It said in a report released yesterday (15 February) that mortgage arrears dropped 7% year on year to 1.07% in December 2017.
Arrears fell to 1.00% in November 2017 from 1.04% the previous month. But S&P Global said that they typically increase in December off the back of Christmas spending.
“This is a cyclical pattern. Year-on-year comparisons, which are more meaningful, suggest that things are mostly looking up,” it said.
The agency partly attributes the December drop to improving employment conditions.
“While there are risks in this environment of cautious economic optimism, we expect arrears to remain stable, with small movements driven by changes in interest rates.”
Home loan repayments between 31 and 60 days in arrears dropped 19% in dollar terms to 0.30%, while repayments more than 90 days past due increased around 13% to 0.63% in December from the same month a year earlier.
S&P Global noted an increasing trend in the more advanced category of 90-plus days in arrears. More than half of the loans in this category are domiciled in Western Australia and Queensland.
“While there have been improvements in these states on some economic fronts, we expect borrowers in the more advanced stages of arrears to face tougher refinancing prospects,” it said.
Among RMBS lenders, nonbanks recorded the largest improvement, with loans more than 30 days in arrears dropping 28% to 0.69% in December. Nonbank originators now have the second-lowest arrears in the prime RMBS sector after nonbank financial institutions (0.60% in December).
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