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Arrears on prime residential mortgage have “remain elevated” while delinquencies on non-conforming home loans dropped to a new record low, according to Standard & Poor’s latest research.
The latest data from ratings agency Standard & Poor’s (S&P) has revealed that despite typically falling in June, arrears underlying Australia’s residential mortgage-backed securities (RMBS) remained stable at 1.38 per cent.
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However, S&P noted that while home loan arrears “remain elevated year-on-year”, it expects the performance of prime mortgages to “diverge as lenders compete for low-risk borrowers”.
S&P added: “This is positive for Australian residential mortgage-backed securities because around 60 per cent of the loans that underlie portfolios are amortizing, owner-occupier residential mortgage loans with modest loan-to-value ratios.”
Conversely, the ratings agency noted that the “ongoing transition of interest-only to amortizing loans, and a general tightening in credit conditions”, could “create refinancing difficulties for higher-risk loan products and borrowers”.
However, S&P claimed that it remains confident that borrowers would manage such risks in a stable economic environment.
“Relatively low interest rates and low unemployment are helping borrowers to manage the transition to principal and interest loan repayments, and there has not been a material increase in arrears in Australian RMBS portfolios to date.”
Mortgage delinquencies were highest in the Northern Territory (2.79 per cent), followed by Western Australia (2.66 per cent), Queensland (1.78 per cent), South Australia (1.52 per cent), Tasmania (1.35 per cent), Victoria (1.17 per cent), NSW (1.03 per cent) and the ACT (0.73 of a percentage point).
Meanwhile, non-conforming arrears dropped to a new record low of 3.44 per cent, down from 3.65 per cent in May.
According to S&P, the continual drop in non-conforming arrears is attributable to “sustained increases in outstanding loan balances”.
“Non-conforming arrears have continued to fall for the past five years off the back of sustained increases in outstanding loan balances, which have more than doubled during this time,” the ratings agency noted.
“We also attribute the sector’s improved performance to the diverse loan quality of non-conforming transactions, which feature a mixture of near-prime, non-conforming and traditional subprime loans.”
Following the release of May arrears data, Shane Oliver, chief economist at AMP Capital, told The Adviser sister publication Mortgage Business that the fall in non-conforming arrears could be attributable to strong jobs growth in NSW and Victoria, where issues of non-conforming loans typically lend.
“The lenders that provided non-conforming loans tended to focus on areas where the borrowers were reasonably secure in terms of their job — NSW and Victoria, in particular,” Mr Oliver said.
“Even though house prices have come off in Melbourne and Sydney, the jobs market in those two cities is still very strong, and so we haven’t really seen any of the pressures that cause arrears for borrowers in those cities and I think that is what’s showing up here.”
When asked if he thinks recent arrears trends have been influenced by an uptake in demand for credit from alternative lenders amid tighter lending standards, Mr Oliver said: “It could be, but I suspect that phenomenon is relatively recent.
“The people who were defaulting probably would have got their loans a few years ago, whereas the shift away from traditional banks towards non-bank lenders is probably a more recent one.
“It’s something that we might start to see more of in a few years when those loans are further down the track, particularly if NSW and Victoria see their economy slow down.”
[Related: Mortgage expenses rise by 43.5% in six years]
