A rise in Australian residential mortgage delinquency rates confirms market suspicions that the full effect of 12 interest rate hikes is still flowing through the market.

According to the latest data for residential mortgage-backed securities (RMBS) by Moody’s Investors Service, the share of prime quality home loans that were 30-plus days in arrears jumped from 1.25% in March 1.38% in June 2023 – yet still below the 1.76% peak reached during covid.

With rate hikes between May 2022 and June 2023 to 4.10% having significantly increased mortgage repayment costs, Alena Chen, the ratings agency’s vice president (pictured) expects delinquency rates to continue rising in 4Q 2023.

Lower savings & higher variable rates

What’s weakening the ability of borrowers most at risk of not meeting mortgage repayments, adds Chen is a major drop in Australia’s household savings ratio now at its lowest level since 2008 (3.20%) – courtesy of elevated consumer prices and high interest rates.

Chen also suspects the transitioning of many homeowners from fixed to significantly higher variable rates may also heighten the risk of mortgage stress.

“A large share of the outstanding RMBS we rate are by non-bank lenders, which typically have a higher proportion of variable-rate mortgages than banks. Consequently, the share of fixed-rate mortgages in the pool of loans backing outstanding RMBS we rate is lower than the mortgage sector overall,” Chen stated.

While RBA figures suggest around 10% of fixed-rate borrowers who have come off fixed rates (since May 2022) can expect  payment increases of 60%-plus, Moody’s latest update concludes that the “vast majority of fixed-rate borrowers have sufficient income to service these higher loan payments and meet their essential expenses.”

Interestingly, it’s understood that around 14% of those coming off variable rates (at July 2023) can expect their mortgage payments to rise by a similar amount (60%-plus).

Major banks and non-banks

Major banks saw the 30-plus day delinquency rate (for Australian RMBS) hit 1.65% in June, up from 1.45% in March.

Beyond the majors, increases in delinquency rates were also witnessed across:

  • Non-banks hit 1.71% in June, up from 0.78% in March.
  • Authorised deposit-taking institutions (ADI) hit 0.58% in June, up from 0.34% in March.
  • Non-conforming mortgages(loans to borrowers with adverse credit histories or where lenders use truncated means to verify incomes) hit 3.98% in June, up from 3.84% in March – yet still below the 4.80% peak reached during covid.

More rate rises

A lift of the Commbank HSI Index in September suggests the risk of a higher Reserve Bank (RBA) cash rate remains elevated.

Adding to speculation that RBA governor Michele Bullock may again raise rates when the central bank next meets (Melbourne Cup Day) were reports overnight of sustained underlying inflationary pressure in the US.

Core consumer prices in the US (ex-food and energy) were up 0.3%, while headline prices were 0.4% higher.

Clearly, forthcoming (Australian) CPI and wages data for Q3 2023 will be critical for the future direction of interest rates.

But whether there’s a rate rise or not, Bullock expects Australia’s low unemployment rate and recovering house prices to deliver only a modest increase in mortgage delinquencies going forward.

What will further mitigate risks, adds Chen is the progressive tightening in lending criteria implemented by banks and non-banks over the past few years.

While National Australia Bank (NAB) was the only major bank expecting rates to rise (to 4.35%) in November, none of the big-four banks expect the RBA to ease the cash rate until mid to late 2024.