Fitch: Aussie mortgage arrears up in Q422

Oksana Patron

27 March 2023

Australia’s 30+ day mortgage arrears going up by 11bp quarter-on-quarter to 0.82% during the last quarter of 2022 indicates that borrowers are beginning to face stress due to inflation and rising interest rates, according to Fitch Ratings.

The rating agency said that it expected recent cash-rate increases by the Reserve Bank of Australia (RBA) to drive up arrears further in 2023, due to the high ratio of household debt to disposable income and the dominance of floating-rate loans in Australia.

Also, mortgages written between 2019 and 2021, when banks tested serviceability using a buffer of 2.5% above the borrower’s interest rate, were more susceptible to deterioration in performance, as the cash rate is now above this buffer.

At the same time, home prices across Australia’s eight capital cities decreased by 3.3% quarter-on-quarter and 6.9% year-on-year.

This was the largest year-on-year decline since 3Q19.

According to Fitch, home prices will continue to fall in 2023 on affordability constraints and credit tightening. However, losses from the sale of collateral property should stay low due to strong home-price growth over previous years.

The key drivers for mortgage performance include unemployment at record lows, affordability and macroprudential policy to moderate national home-price growth, falling new housing-loan commitments, cash rates increases and arrears which remained sensitive being sensitive to higher interest rates.

Fitch’s data showed that the 30+ day mortgage arrears for Fitch’s Non-Conforming Index rose by 160bp qoq.

Thirteen of the 14 transactions in the 4Q22 Fitch Non-Conforming Index saw higher 30+ day arrears.

Following this, non-conforming borrowers may be more exposed to interest rate increases as their mortgages carry higher rates and they include self-employed borrowers who take low-documentation loans.

Fitch monitors arrears because a loan’s delinquency status is a key determinant of foreclosure and the agency believes borrowers in arrears are more likely to default and therefore, conservatively models all loans that are over 90 days in arrears as being in default.