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Home loans in arrears rise as mortgage stress kicks in
The Australian 12:00am March 23, 2018
Michael Roddan
An unusually high number of borrowers fell behind on their home loan repayments after the latest Christmas period as interest rate increases start to push more families into mortgage stress, according to global ratings agency Standard & Poor’s.
Reports of a spike in home loan arrears in January comes hot on the heels of a warning from Peter Costello that homeowners should brace for “painful” consequences as global interest rates rise from historically low levels.
This week Suncorp launched what could be the first sector-wide interest rate rise on owner-occupiers since 2015, after blaming rising US interest rates for increased funding costs for its own business.
The US Federal Reserve yesterday lifted its official funds rate 25 basis points to 1.75 per cent as it tries to ward off rising inflation in the world’s largest economy.
That leaves its official monetary lever above the Reserve Bank of Australia’s record-low 1.5 per cent cash rate for the first time since late 2000, and analysts are expecting more US rate increases to follow.
Standard & Poor’s said the amount of Australian borrowers falling behind their payments in January jumped to 1.3 per cent, up sharply from 1.07 per cent in December.
“Arrears typically increase in January, reflecting the impact of Christmas spending and summer holidays. However, the magnitude of the month-on-month increase in January was higher than previous month-on-month movements,” Standard & Poor’s analyst Erin Kitson said.
“We believe the impact of incremental increases in interest rates during 2017 could be a contributing factor to the rise in mortgage arrears in January.”
The most vulnerable borrowers, according to Standard & Poor’s, were borrowers with interest-only loans approaching the end of the interest-only period, when monthly repayments jump by about 50 per cent. Borrowers who had saved small deposits and heavily indebted households were also areas of concern.
In the minutes of the Reserve Bank’s most recent board meeting, released this week, it said household debt “warranted careful monitoring” and “contributed to the uncertainty surrounding the outlook for consumption growth”.
Australians have become accustomed to record-low interest rates in recent years, after the Reserve Bank cut official rates to “emergency” levels amid a sluggish economy. Low variable rates offered by mortgage lenders have helped fuel surging house prices in east coast cities, allowing borrowers to pay manageable monthly repayments.
Ms Kitson said the level of arrears could moderate in the coming months. “However, it will only become evident during the next few months whether some of the loans in early arrears categories cure or migrate into more severe arrears categories due to stretched affordability constraints,” she said.
Property investment adviser Pete Wargent played down the concerns. Borrowers in arrears more than a month “were essentially flat from a year earlier,” he said. Mr Wargent said most of the rise in arrears was attributable to borrowers in Western Australia and the Northern Territory, whereas loan quality had improved in NSW, South Australia and Tasmania.
Standard & Poor’s said loans in arrears by more than 30 days increased from December to January in every state and territory.
West Australian borrowers had the worst record, with loans in arrears rising to 2.44 per cent in January, from 2.08 per cent a month earlier. This was “a new record high”, Standard & Poor’s said. For comparison, NSW recorded an arrears rate of 0.98 per cent — the lowest in the country.
“Improving employment conditions will help keep defaults low, but rate rises will have an impact on borrowers,” Ms Kitson said.
“The prudence of loan underwriting standards, particularly debt-serviceability calculations, is fundamental to how well borrowers absorb these higher costs.”