Volumes of home loan arrears have dipped in August in a movement that was widely expected by some top international analysts.
The number of delinquent housing loans underlying residential mortgage-backed securities (RMBS) fell to 1.10% in August from 1.17% in July, said S&P Global Ratings in the agency’s regular RMBS Arrears Statistics: Australia
report released yesterday (18 October).
This drop is not unusual because arrears have fallen in August for the past decade, analysts wrote. They noted that this downward movement was partially caused by an increase in outstanding loan balances during this time period.
Arrears for non-conforming loans also dropped from 4.80% in July to 4.48% in August. This was despite a decline in outstanding balances during the month.
Looking at a state-by-state breakdown, arrears decreased everywhere except in the ACT where loans over 30 days past due rose by 0.01 percentage points to 0.63%. Despite this, the ACT recorded the lowest percentage of arrears for the month.
The Northern Territory reported the biggest improvement with arrears falling from 1.98% to 1.63% over the month.
“Because loan exposures are small in the NT, at just under 1%, arrears performance can exhibit greater volatility in percentage terms,” analysts wrote.
Arrears performance in Western Australia also fell from record highs of 2.38% in July to just 2.22% in August.
In New South Wales, Victoria and Queensland where 80% of all loan exposures are recorded, the volume of delinquent loans receded.
Record low interest rates continue to promote low level of arrears particularly in the interest-only space, analysts said.
“Low interest rates have had a more pronounced effect on interest-only loans, which have recorded a more rapid decline in arrears than amortizing loans for the past few years.”
S&P analysts said that while lending standards have tightened in general due to increased regulatory scrutiny beginning in 2015, loans underwritten prior to that date could be more susceptible to arrears. This was particularly amongst interest-only loans with higher loan-to-valuation ratios (LVRs) in which no equity had built up during this period.
“Increases in mortgage rates will put pressure on arrears for certain borrowers, particularly more recent originations with higher LTV ratios. Provided employment conditions remain relatively stable, however, we do not anticipate arrears materially increasing above current levels in the next 12 months.”
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