Moody’s warns mortgage arrears will continue to rise

High interest rates and inflation will continue to push up mortgage delinquencies in Australia, despite the RBA keeping the cash rate on hold, ratings agency Moody’s has warned.

High interest rates and inflation will continue to push up mortgage delinquencies in Australia, despite the Reserve Bank’s decision this week to keep the cash rate on hold, ratings agency Moody’s ­Investors Service has warned.

In a new report released on Wednesday, it warns that borrowers who took out fixed-rate mortgages before the Reserve Bank started raising rates in May last year are particularly at risk.

Moody’s said Australian mortgage delinquency rates had increased over the March quarter and would do so in future.

“We expect delinquencies will continue to increase over the next 12 months because of high interest rates and inflation,” it says.

“Borrowers who took out mortgages at very low interest rates in the few years before the Reserve Bank of Australia started its monetary tightening cycle pose a particular risk.”

The report, which is based on data on residential mortgage- backed securities rated by Moody’s, warns that the expiry of fixed-rate mortgages over the next 12 months will compound risks, with inflation further eroding borrowers’ ability to meet home loan repayments.

“The fixed-rate period for a large number of mortgages will end over the next 12 months, at which point borrowers will roll into home loans with much higher interest rates, compounding the risk of delinquencies,” it says.

The latest data for residential mortgage-backed securities rated by the agency shows the share of prime quality home loans at least 30 days in arrears rose from 1.05 per cent in December to 1.26 per cent in March.

The delinquency rate for non- conforming mortgages, (loans to borrowers with adverse credit histories or where lenders used “truncated means” to verify ­incomes), rose by a greater rate, increasing from 3.35 per cent in December to 4.04 in March.

The report notes that delinquency rates at the moment are below the peak of 1.76 per cent for prime mortgages and 4.80 per cent for nonconforming home loans during the pandemic.

It says this is expected to increase following the move by the Reserve Bank to increase rates by a total of four percentage points since May last year.

But it says that Australia’s low unemployment rate, 3.6 per cent in May, should mean mortgage delinquencies will only rise moderately.

“Additionally, lenders have substantially cut back on risky mortgage lending over recent years, which will mitigate risks in an environment of high interest rates and inflation,” it says.

The report notes that fixed-rate mortgage lending, which averaged around 20 per cent of outstanding housing credit in Australia before 2020, increased significantly during the Covid-19 pandemic to a peak of 46 per cent of total monthly housing loan commitments in July 2021.

“Many borrowers took out fixed mortgages at very low interest rates during the pandemic, usually with a fixed term of three years or less.

“When the fixed rate term for a large share of these home loans expires over the next six to 12 months, borrowers will roll into mortgages with much higher interest rates, compounding the risk of delinquencies.”