Home loan delinquencies at highest since pandemic, rate hikes to push them higher

Australian homeowners are feeling the pinch as mortgage delinquencies reached their highest point following the RBA’s November rate hike.

Australian homeowners are feeling the pinch as mortgage delinquencies reach their highest point since the pandemic, following the Reserve Bank’s November interest rate hike.

The percentage of mortgages in arrears — overdue by 30 days or more — rose 0.1 percentage points in the December quarter of 2023 to 1.21 per cent, their highest level since May 2020 when the pandemic first hit, according to a new report from Fitch Ratings.

The debt ratings agency believes stubborn inflation will mean the Reserve Bank of Australia is likely to keep interest rates at their current 12-year high of 4.35 per cent for most of the year, pushing the nation’s arrears rate to up to 1.4 per cent.

Aiming to control runaway inflation in the wake of the pandemic, the central bank in 2022 began its most aggressive interest rate tightening in generations, hiking the cost of so-called “risk-free” money from 0.1 per cent to 4.35 per cent by November 2023.

The RBA this week decided to keep the cash rate on hold, as it warned the war isn’t yet won on inflation.

“Fitch expects the RBA’s 2022 and 2023 cash-rate hikes to drive up arrears in 2024, due to the high ratio of household debt to disposable income, reduction in household savings and the dominance of floating-rate loans in the Australian market,” the agency said.

“Inflation continues to be above the RBA’s target range, which led to another increase in the official cash rate in 4Q23 to its highest level in more than 10 years. Fitch expects rates to remain at this level for the majority of 2024.”

A surprising fall in the unemployment rate to 3.7 per cent in February, from 4.1 per cent a month earlier, is dampening expectations of mortgage relief. This is because a tight jobs market could lead to wage growth, and potentially higher prices.

In its Financial Stability Report on Friday, the RBA said the strong labour market and the huge saving buffers accumulated during the pandemic were easing the mortgage pain.

The bank acknowledged, however, many homeowners were feeling the pressure of higher living costs and high debt repayments.

It said that about 5 per cent of variable-rate owner-occupier borrowers were spending more than they were earning.

This was leading to a “cash flow shortfall,” particularly among lower income households, it said.

“In addition to cutting back their spending to mostly essential items and trading down in quality for some goods and services, these households have had to make other adjustments to continue servicing their mortgages,” the bank said in the report.

“These include drawing down on liquid savings, selling assets and working additional hours.”

Meanwhile, Fitch said nonconforming home loan arrears, which include loans to borrowers with lower credit scores, self-employment, or limited documentation, grew 0.24 percentage points in the December quarter to 3.69 per cent.

This remains significantly lower than the historical peak of 20.9 per cent in early 2009 and the more recent five-year pre-pandemic average of 6 per cent, according to Fitch.

Originally published as Home loan delinquencies at highest since pandemic, rate hikes to push them higher