Banks jostle to pick up good borrowers as all signs point to ’back to normal’ housing defaults in 2023

Bank watchers say the industry is preparing for the 2023 rates bump and potential housing defaults that will follow.

As seven rate hikes ripple through the economy, the earliest signs of mortgage stress are only starting to emerge. But bank watchers are warning that a normalisation of bad debts is coming.

The roll-off of tens of thousands of fixed-cost loans set to fall due in the middle and second half of 2023 is expected to put pressure on the local home loan market.

Many borrowers looking to refinance will be confronted by a lending market far less accommodating than during the depths of the Covid-19 pandemic, coupled with a slide in house prices.

Data from S&P Global Ratings shows arrears in prime home loans were steady in September, but arrears ticked up in non-conforming loans.

Total 30+ day arrears on prime loans stood at 0.58 per cent nationally, led by the Northern Territory and Western Australia, while arrears on nonconforming loans rose to 2.24 per cent of total loan stock, from 2.07 per cent in August.

But recent years have seen a rapid run-up in the total current loan balance of non-conforming borrowers, as more Australians have sought access to funds via non-traditional pathways. Non-conforming loans almost doubled between 2019 and 2020 to almost $16bn in September 2022.

S&P Global Ratings said it expected a rise in arrears as the economy slowed, falling harder on nonconforming loans, forecasting a bump in arrears in January and February on the back of Christmas spending.

S&P Global Ratings primary credit analyst Erin Kitson said while Australia was unlikely to face a major contraction in jobs, there would be stress among highly leveraged borrowers.

“Not all borrowers are the same; interest rates will impact borrowers differently. A more highly leveraged borrower, an investor on a high income, is perhaps not as risky as a person who purchased at the peak of the property market,” she said. Ms Kitson said banks were mindful of the kinds of borrowers looking for loans and were trying to court safer borrowers to preserve market share without compromising on the safety of their loan books.

“Despite the fact the risks are increasing there’s quite a strong level of competition around for those lower-risk borrowers who will all be shopping around for better mortgage rates,” she said.

Commonwealth Bank moved last week to lower the rate on its wealth package loans by as much as 2.03 per cent, touting the offering to borrowers with healthy equity buffers in their properties.

But CBA’s go-slow approach elsewhere has seen the bank’s loan book grow below system.

Clime Capital chief investment officer Will Riggall said CBA’s September quarter results showed it was being more selective in how it took on risk.

But he said this move opened space for other banks, such as Westpac and NAB, to scoop up more borrowers. “It’s about positioning for the eventual debt cycle increase,” he said.

Mr Riggall said NAB and Westpac were more compelling investments than CBA, given its high price and the success of the other two banks in executing growth and transformation strategies.

“CBA, the reality is they should be able to price their risk better. They’re looking to attract the lower-risk borrowers at this time the other banks aren’t as sophisticated,” he said.

A rise in cost of living and increased mortgage rates are putting pressure on the Australian housing market. Picture: Lisa Maree Williams/Getty Images

Home loan settlement platform PEXA is seeing a large number of borrowers in outer suburban areas refinancing, in a move that signals borrowers in those areas are more sensitive to the recent spate of rate rises.

PEXA chief economist Julie Toth said settlements were slowing down, pointing to a slackening of the frenetic pace the housing market had set in recent years. But she said it was curious to note how many borrowers who were looking to refinance could be retained by banks offering more attractive rates.

“Customers are active players in the market and they can and do and are seeking out alternative financing,” she said.

“The banks as financial institutions want to keep their good borrowers.”

The lending landscape was up-ended during the pandemic.

A torrent of cheap money from the Reserve Bank through the Term Funding Facility supercharged bank books, allowing minnows to rise while whales like ANZ went backwards as clunky loan processing systems struggled in light of the strictures of working from home.

Online lender Tic:Toc, which writes its own loans but keeps them on Bendigo Bank’s books, has profited from the pandemic.

Total loans written by the lender now stand at almost $4bn, but Tic:Toc boss Anthony Baum said many borrowers coming to him trying to refinance were being caught out by the shift in rates.

He said almost one in five lenders who tried to refinance through Tic:Toc’s site were unable to pass serviceability tests, which impose a 3 per cent buffer above current repayment levels.

“We’ve allowed our regulatory framework to weaken to the point where customers are able to borrow very large amounts of money,” he said.

“We’re ending up with a growing cohort who are effectively home loan prisoners because they can’t pass serviceability for a new lender even if they’re a good performing customer from a credit perspective.”

Mr Baum said Tic:Toc was still able to pass on comparatively cheaper rates to borrowers than other non-bank lenders who securitised their loans.

“If you’re a lender into the prime customer cohort, as a securitiser you’re not competitive with the banks on a funding cost perspective because of the yield curve and credit spreads,” he said.

“That’s not new.

“If you think about the Global Financial Crisis, that’s exactly what happened ... the GFC hit and all the securitisers became uncompetitive for the better borrowing cohorts and securitisation became a niche product for the near prime and subprime cohort.”