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As the arrears rate steadily climbs, a panel of brokers have discussed the warning signs members of industry should be aware of.
Although coming off historical lows, the rate of mortgage arrears has increased over the last few months, with many bank economists expecting this to continue increasing throughout 2024.
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The Reserve Bank of Australia (RBA) outlined what’s causing arrears to increase in its latest RBA Bulletin, attributing the arrears rate to unexpected shocks resulting in loss of income or an unexpected pressure on household budgets.
The RBA categorises these shocks into two factors: idiosyncratic factors and macro-economic factors.
The former refers to unrelated economic conditions such as loss of work or “personal misfortunes” (illness or relationship breakdown), which tend to happen even during periods of strong growth, meaning that there will always be some borrowers experiencing challenges in making repayments.
Declining real wages, higher interest rates, and rising unemployment comprise the macro-economic factors, which contribute to a cyclical increase in arrears rates.
“These factors – also referred to as common time factors – make it more difficult for all borrowers to service their debt, particularly those who are more highly leveraged or who have borrowed closer to their maximum capacity,” the RBA said.
As such, a recent panel discussion among mortgage brokers from brokerage Home Loan Experts discussed how to recognise the warning signs that a borrower may be falling into arrears and what they can do about it.
Home Loan Experts senior mortgage broker Jonathan Preston said borrowers should “make moves sooner rather than later” if their cash flow is beginning to become an issue.
“The most important thing is to address it as quickly as possible. Once someone falls into arrears, lending becomes a big problem, and rates skyrocket if the loan is refinanced,” Preston said.
“It is important to be on the front foot when it comes to this kind of thing; otherwise, people are playing with fire and are risking their credit files and assets.
“Addressing falling into arrears might mean going onto an interest-only loan, renting out rooms, maybe putting your house up on Airbnb and renting long-term elsewhere, or moving back in with family. Sacrifices may have to be made.”
Senior broker manager Mary Eskander said that a reduction in household savings should be a red flag.
“…another indicator could be if they seek further credit to cover existing debt. The last sign I can think of is if a client is living paycheck to paycheck,” Eskander said.
“This could be a red flag that they are heading towards a potential missed payment, leading to arrears.”
While arrears are increasing, the changes have been kept in check and mitigated through a variety of opportunities in the market.
Discussing these themes, director of structured finance at S&P Global Ratings, Erin Kitson, said: “Mortgage arrears have been steadily increasing, albeit off very low levels, but I think the increases have certainly been modest.
“What’s helped to underpin that stability that we’ve seen, despite the rapid interest rate rises, has been low unemployment. That’s been fundamental to keeping arrears low.
“But I think other things that have helped overall has been the refinancing market environment. Refinancing conditions have tempered a little bit, but that’s certainly been an avenue that’s helped borrowers alleviate debt serviceability pressures by being able to take advantage, for those that could, of a better mortgage rate.”
[RELATED: The opportunities that have kept arrears from skyrocketing]
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