Home loan arrears fell across Australia during the month of February, after we saw a rise in January.
The Standard & Poor's Performance Index (SPIN) for Australian prime mortgages decreased to 1.16% from 1.30%, according to a report by S&P Ratings.
The report titled RMBS Arrears Statistics: Australia, said that arrears are a lagging indicator, meaning these improvements partly reflect stronger jobs growth nationwide. This includes resource-oriented states, where arrears declined year on year in February to 1.53% from 1.65% in Queensland and to 2.27% from 2.32% in Western Australia.
Improving conditions in the broader economy are helping to stem the flow of new loans moving into arrears, as evidenced by the more pronounced improvements in the earlier arrears categories. However, loans in arrears in the most severe arrears category are not improving.
The report read: “How well borrowers can manage the pressures of rising interest rates, given wage growth constraints, depends on a few key factors. The most important factors are their loan-to-value (LTV) position and refinancing prospects.
“The strong property price appreciation of recent years, coupled with low interest rates, has improved the LTV position of many borrowers, helping to offset this risk, to a degree.
“Borrowers transitioning from interest-only to amortizing loans are vulnerable to the risk of repayment shock, however. Half of the interest-only loans in portfolios of residential mortgage-backed securities in Australia will transition to a principal-and-interest repayment structure by 2019. Of these interest-only loans, around 12% belong to owner-occupiers.
“We believe owner-occupiers are more likely than investors to struggle with the transition to principal-and-interest repayments, particularly for loans underwritten before 2015, when lending standards for interest-only loans were not as stringent.”
The report found that the fall was the same across all states and territories in the country.
Loans more than 90 days in arrears reached 0.66% in February, above their average for the past decade of 0.52%. More than half of these loans are located in either Queensland or Western Australia.
S&P Ratings said this was unlikely to change thanks to slower property price growth in these states, plus sluggish wage growth and the prospect of future interest-rate rises more broadly.