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Gradually falling interest rates this year are expected to keep mortgage arrears low and stable as pressure eases on borrowers, according to S&P.
Arrears are likely to remain low and appear to have stabilised, with the pressure exerted by rising unemployment offset by lower interest rates, new Standard & Poor’s (S&P) research showed.
Prime mortgage arrears were 0.87 per cent in the quarter ended December 2024, easing from 0.89 per cent the previous quarter, S&P Global Ratings’ (S&P) RMBS Performance Watch: Australia quarterly report found.
Nonconforming arrears broadly held steady, with a slight increase from 4.18 per cent in the fourth quarter, up from 4.01 per cent in the prior quarter.
Property price growth eased mortgage stress on financially stretched borrowers and benefited those with nonconforming mortgages, S&P said.
Prime investor arrears were at 0.69 per cent versus 1.00 per cent for owner-occupiers.
Investor arrears generally showed fewer signs of stress, with investors benefiting from the ability to offset higher mortgage repayments against higher rentals, S&P research said.
Looking ahead, S&P said that gradual rate cuts, which the market generally expects, will help keep arrears around long-term averages.
That will be a boon for borrowers, after home loan arrear rates increased at some major banks in the third quarter of 2024 amid high interest rates and cost-of-living pressures.
There were notable geographical variations in the rate of arrears for December 2024.
Victoria had the nation’s highest arrears rate of any state or territory at 1.08 per cent based on prime residential mortgage-backed securities (RMBS) loans.
The largest year-on-year declines in arrears were recorded in Western Australia, where arrears were 0.8 per cent in December; in the Northern Territory, where they were 0.91 per cent; and in Queensland, where they were 0.65 per cent.
Arrears were higher in postcodes on the fringes of more populous capital cities, where debt-to-income ratios were typically more stretched, S&P said.
Prepayment rates to rise
For mortgage prepayments, rates fell in the fourth quarter for prime and rose for nonconforming transactions, according to S&P data.
Prime prepayment rates tracked around the 10-year long-term average, edging down to 20.72 per cent in the December quarter from 20.87 per cent a quarter before.
Nonconforming prepayment rates rose marginally to 34.23 per cent from 32.58 per cent in the September quarter.
Prepayment rates typically fall in the last quarter of the year, S&P said, so there was a seasonal element to the trend.
S&P is forecasting prepayment rates to rise as the interest rate cut cycle begins, saying that it could potentially revive refinancing activity.
[Related: Should APRA have a set arrears target?]
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