International credit ratings agency Moody’s expects the number of mortgage delinquencies in Australia to rise in the coming months.
Delinquencies refer to mortgages with 30 days or more of missed payments.
According to Moody’s, residential mortgage-backed security delinquencies rose by 1.58% in December 2018 from 1.49% in September 2018.
These delinquency rates were even higher for the major banks, rising from 1.64% to 1.77% across the big four.
High levels of debt and a plethora of interest-only mortgages reverting to principal and interest payments are set to cause many existing mortgages to become delinquent.
Falling house prices were also listed as a key factor. Moody’s noted the fact that house prices in Australia declined by more than 6% year-on-year to February 2019, while recent CoreLogic data revealed Sydney and Melbourne house prices declined by 10.4% and 9.1% respectively.
Moody’s said in a market briefing it “expects prices to continue to decline moderately over the remaining months in 2019”.
“Meanwhile, a large number of interest-only mortgages are due to convert to principal and interest loans over the next two years, which will cause some delinquencies over this period,” Moody’s said.
“When interest-only loans convert to principal and interest, borrowers have to make higher monthly repayments, which can lead to delinquencies.”
Banks settled a large number of interest-only loans in 2014 and 2015: the standard interest-only period is five years, so many of these loans are coming to the end of their interest-only lives.
So many of these interest-only loans were settled that APRA had to step in and limit the growth of interest-only loans to 30% per-year.
However this rule was lifted in late 2018, and ANZ has already acted by extending its interest-only period from five years to ten years in a bid to encourage activity.
While short-term delinquencies are expected to rise moderately by Moody’s, it doesn’t expect defaults and losses to change too much, thanks to stable GDP growth of around 2.5% and low unemployment remaining at around 5.5%.
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Picture source: ANZ