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Arrears to rise as repayments outpace income growth: Moody’s

Arrears to rise as repayments outpace income growth: Moody’s
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Residential mortgage delinquency rates are set to continue to increase in 2024, a report has flagged.

Moody’s Investor Service’s latest data on residential mortgage-backed securities (RMBS) has revealed the rate of mortgages in arrears is set to rise throughout the year as mortgage repayments have “significantly outpaced income growth”.

According to the data, the share of prime-quality home loans in 30-plus day arrears increased to 1.62 per cent in December 2023, an increase from 1.45 per cent in September 2023 and 1.05 per cent in December 2022.

The arrears rate for nonconforming mortgages also rose to 3.91 per cent in December 2023, up from 3.39 per cent in September.

Mortgage repayment amounts have increased 44 per cent since the Reserve Bank of Australia (RBA) began increasing the official cash rate in May 2022, while the average weekly earnings have increased only 7 per cent during the same period.

Moody’s flagged that mortgage holders who took out a home loan in 2021 and 2022 “pose a particular risk”.

Borrowers who bought houses when prices were still high now face larger monthly instalment plans and interest rates for these borrowers sit above the serviceability assessment rate, Moody’s stated.

“We expect delinquency rates will only increase moderately overall, because unemployment remains low,” the report stated.

“Additionally, house prices are rising, providing borrowers with equity. Rising equity increases the likelihood that borrowers in financial difficulty will be able to refinance their loans or sell their properties at high enough prices to repay debts.”

This data came as the Council of Financial Regulators (CFR) noted mounting concerns over loan arrears and hardship requests.

In its quarterly statement, the CFR said while risks to the Australian financial system from lending to households remain stable, “ongoing close attention” is still necessary.

Although the CFR stated that most households are able to meet their servicing and repayment requirements, there has been an increase in the number of households falling into arrears.

While the increase is off the back of “historically low levels” of mortgage arrears, it added that hardship applications had “risen materially”.

Its statement read: “Most households continue to be able to meet their debt servicing and other essential spending commitments, although many have had to make adjustments to their finances in a period of higher inflation and interest rates. However, hardship applications had risen materially over the past year.”

This coincided with S&P’s RMBS Performance Watch: Australia quarterly report that found that prime mortgage arrears had risen to 0.97 per cent by the end of December 2023 (from a historical low of 0.58 per cent), while illion recently found that 0.4 per cent of all home loan accounts (approximately 23,000) are in some type of hardship agreement.

[RELATED: Hardship applications have ‘risen materially’, finds CFR]

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