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Mortgage delinquencies are rising from record lows and are likely to rise further.

by xyonent
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Mortgage.jpg

Key Takeaways

Mortgage arrears rates rose from a Covid-19 low of 1.0% in the third quarter of 2022 to reach 1.6% in the March quarter of 2024. This is the highest mortgage arrears rate since the first quarter of 2021.

The average variable interest rate on outstanding home occupancy mortgages will increase from 2.86% in April 2022 to 6.39% in March 2024, increasing monthly payments by about $1,600 for a borrower with $750,000 in debt.

Mortgage delinquencies are above the series average, but most borrowers are maintaining their payments by using savings, increasing their hours or working multiple jobs, or reducing their contributions to mortgage offsets or refinance facilities.

As unemployment rises, household savings will fall further and the broader economy will weather a period of weakness, but a major “explosion” in arrears is unlikely unless the labor market weakens more dramatically than expected.

Mortgage delinquency rates rose from a pandemic low of 1.0% in the third quarter of 2022 to reach 1.6% in the March 2024 quarter.

This was the highest mortgage delinquency rate since the first quarter of 2021, although the proportion of loans with late payments was slightly higher at 1.8% at the start of the COVID-19 pandemic.

Mortgage arrears

The increasing trend in late payments was most influenced by non-performing loans, with the delinquency rate rising to 0.93%.

A bad debt is one that is at least 90 days past due or that the lender does not expect to collect in full the amount due.

Delinquency rates for non-performing loans are currently slightly higher than at the beginning of the COVID-19 outbreak (0.92%) and above the series average of 0.86%.

Borrowers who are 30 to 89 days late on their payments account for 0.68% of loans, up from just 0.35% in the third quarter of 2022 but still the highest level since the second quarter of 2020.

This early mortgage delinquency rate is currently above the series average (0.59%) but remains slightly lower than levels recorded at the beginning of the COVID-19 outbreak (0.86%).

The main driver of the rise in mortgage delinquencies is, of course, the sharp rise in the cost of debt.

If the average variable interest rate on outstanding home occupancy mortgages increases from 2.86% in April 2022 to 6.39% in March 2024, a borrower with $750,000 in debt would pay roughly $1,600 more each month in scheduled payments.

Mortgage Debt Ratio and Interest Rates

But there are other factors

Cost of living pressures are consuming a larger portion of household income, households are paying more tax than ever before and household savings are being drawn down, eroding savings buffers built up throughout the pandemic.

There is also the fact that households are sensitive to sudden adjustments in interest rates, given their historically high debt levels, a large portion of which is mortgage debt.

Easing labour market conditions will also play a role.

Although each measure of mortgage delinquency has risen above its relatively short series average of just five years, most borrowers are continuing to make their mortgage payments on time despite the headwinds mentioned above.

They have done this by drawing down on savings, increasing their hours or working multiple jobs, and reducing their contributions to mortgage offsets and reborrowing facilities.

Mortgage arrears are likely to rise further as unemployment rises, household savings decline further and the broader economic climate weathers a period of weakness.

But unless the labor market weakens much more than expected, arrears are unlikely to experience a significant “explosion.”

For homeowners who are behind on their payments, most are likely able to sell their property to pay off their debts.

The RBA’s latest debt-to-income estimates suggest that only around 1% of homes across Australia have debt levels that exceed their value.

As home prices continue to rise, debt risk is decreasing.

Another factor in low mortgage delinquency rates is likely to be Australia’s history of strict underwriting standards by financial institutions and the prudential regulator, APRA.

A borrower’s ability to repay will continue to be assessed at the mortgage interest rate, which is 3.0 percentage points above the loan product rate, following APRA’s increase in the repayment capacity buffer in October 2021 from 2.5 percentage points.

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