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Prime and non-conforming mortgage arrears rose during the first quarter of 2023, according to S&P Global Ratings, as rising interest rates and cost-of-living pressures weighed on debt serviceability.
S&P Global Ratings has reported prime mortgage arrears rose to 0.95% in March 2023, up from 0.76% in December 2022, while non-conforming arrears hit 3.7% in March, up from 3.2%.
The results show that the cumulative effect of multiple interest rate rises taking effect, S&P Global said, with borrowers' savings buffers eroding as the cost of living rises.
S&P Global Ratings’ report RMBS Performance Watch: Australia for Q1 2023 suggested refinancing conditions have tempered arrears by enabling many borrowers to switch to lower mortgage rates, reducing stress.
However, as interest rates continue to rise, S&P said that refinancing conditions “are becoming tougher for many borrowers, particularly those who are more highly leveraged”.
“This is likely to add to arrears pressure because refinancing is a common way for borrowers to self-manage their way out of financial stress,” S&P Global Ratings said.
Falling prepayment rates in the non-conforming sector in the first quarter reflect the increasing hurdles faced by borrowers trying to switch to a lower mortgage rate, the ratings company said. Prime prepayment rates remain elevated, due to stronger competition for prime borrowers among lenders.
“This competition is likely to persist until the large volume of loans due to roll off fixed rates onto variables rates is worked through for prime borrowers but will grow harder as the mortgage wars subside,” the report stated.
S&P said that arrears increases to date had been delayed by built-up savings and strong jobs growth, which had enhanced job mobility and competitive lending conditions.
“Despite the difficult times ahead for some borrowers, we expect strong employment conditions and proactive efforts by lenders to work with affected borrowers to minimise any dislocation in mortgage markets and systemic risk.
“A recent stabilisation in property prices is also credit positive because it will help to limit the extent of losses in the event of borrower defaults.”
