Mortgage arrears, delinquencies to rise: Moody’s

Australia’s mortgage arrears are set to increase if property prices fall and interest rate increases follow the forecasted steep trajectory, new analysis shows.

Mortgages arrears could rise in the coming months as interst rates rise, according to Moodys. Picture: NCA NewsWire / John Gass

Australia’s mortgage arrears are set to increase if property prices fall and interest rate follow the sharp upward trajectory forecasted, new analysis from analysts Moody has found.

Tuesday’s interest rate rise by the Reserve Bank of Australia is likely to pose the most risk to mortgages with high balances and those who have taken out loans at the top of their capacity as the national delinquency rate decreased to 1.20 per cent in November 2021 from 1.44 per cent the year prior, according to the service’s latest Australian residential mortgage delinquency map.

Moody’s Investors Service vice president Alena Chen said the 25 basis point increase in the cash rate to 0.35 per cent will push up mortgage variable rates, which will worsen borrowers’ capacity to repay debt and increase the risk of delinquencies and defaults.

“Interest rate rises will also weigh on house prices, which will add to risks of home loan delinquencies and defaults, because a weakening housing market will make it harder for borrowers in financial trouble to sell their properties at high enough prices to repay their debt,” Ms Chen said.

Delinquency rates decreased in most Australian states and territories over the year to November 2021, with two exceptions. The delinquency rate was lowest in the ACT (0.57 per cent) and highest in the Northern Territory (2.30 per cent), while New South Wales (1.04 per cent), Tasmania (1.11 per cent) and Queensland (1.17 per cent) snuck in below the national average of 1.2 per cent. Victoria sat at 1.23 per cent, below South Australia (1.40 per cent) and Western Australia (1.67 per cent).

Declines were also reported in 61 out of 87 regions across Australia, with the Coffs Harbour – Grafton region in New South Wales recording the lowest delinquency rate (0.38 per cent) and the Northern Territory – Outback region the highest rate (2.58 per cent).

Delinquencies have not surpassed more than 2 per cent of the market over the past 17 years.

It comes as ANZ revealed in its half-year results on Wednesday that a third of all borrowers were more than two years ahead on their repayments, while seven in 10 home loans were above the required amount. Only 0.7 per cent of home loans were in arrears.

Major banks are forecasting a 1.75 per cent increase in the cash rate by the end of 2022, surpassing 2 per cent in 2023. PropTrack senior economist Eleanor Creagh rejected the idea that the RBA would move so quickly given market uncertainty, suggesting the economy could instead self-regulate as inflation outpaces real wages growth.

“If the trajectory markets are pricing were to play out, mortgage rates would see a commensurate large and aggressive adjustment, with repayments increasing at a rate of knots.

“For existing mortgage holders, housing affordability will get worse over the next 12 to 18 months as repayments become more expensive with rising interest rates. Consumption makes up almost two thirds of GDP and for the many Australians that borrow to own a home their house is their largest asset. If the value of this asset declines, the “wealth effect” kicks in and can see households spending less, weighing on economic growth.”