S&P Ratings, one of the leading credit ratings agency in Australia, has released a report suggesting that the mortgage market is thriving despite the ongoing issues in the rest of the economy, and declaring that it might, so far at least, be ‘pandemic proof’.
The unique situation in the home loan market, with ultra-low interest rates, high levels of saving and active refinancing could be leading to a situation where the mortgage market displays an unusually high level of resilience to recession, lockdowns and the pandemic.
“What the report and the performance stats are showing, particularly on the mortgage arrears front, are that the pandemic hasn’t had a significant impact on household debt serviceability, i.e. people being able to repay their mortgages,” said Erin Kitson, an RMBS analyst at S&P.
“That’s been underpinned by a couple of key factors. First and foremost is the historically low interest rate market, as the Australian mortgage market has a high proportion of variable rate mortgages, and the loans underlying the RMBS transactions are more weighted to variable rates.”
“There’s a transmission effect there, because with a lowering of interest rates you generally see improvements in debt serviceability. That’s a key factor.”
“The other thing that is helping, which is a pandemic nuance, is that household savings have built up.”
“There are fewer spending options, especially with no overseas travel and less interstate travel, particularly if you’re in Victoria or now New South Wales. That has contributed to a build up in household savings.”
“Obviously, from a consumption perspective, that’s not great because the RBA is hoping that people will spend and not save, but from a debt serviceability perspective, if you have household savings then you have repayment buffers to help if there’s any pressure on your income to continue to meet mortgage repayments.”
“What is also helping debt serviceability is the strong refinancing conditions, which is indicative of strong, competitive lending conditions. Strong refinancing conditions enable borrowers that are feeling financial pressure to self-manage their way out of an arrears situation by going and shopping for another home loan at a better rate with a different lender.”
“That’s a common way to self-manage a way out of any financial pressure, and given the strong competition with those ultra-low fixed home loan rate offers, there’s a lot of refinancing. That’s another strong positive for serviceability.”
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