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It’s going to take more rate cuts to have a tangible impact on arrears rates, said S&P Global Ratings in its RMBS Performance Watch: Australia report.
February saw the first rate cut in over four years. Then, in May, the Reserve Bank implemented a second 25-bp cut for the year.
While this is great news for borrowers, more substantial action is needed to have an impact on arrears, said S&P, with the May decision having a “muted” effect.
“Forecast modest reductions in the cash rate will help alleviate debt serviceability pressures, given the RMBS sector’s high variable-rate exposures. Lower interest rates could also energise refinancing levels as lending competition ratchets up,” said S&P Global credit analyst Erin Kitson.
“This will be offset by increasing global and economic uncertainty, which may elicit more cautious behavior from the household sector. It might influence spending and saving patterns in the months ahead as borrowers navigate a more uncertain economic outlook.”
Uncertainty remains a key challenge. With global supply trade impacted by tariffs, business and consumer confidence are taking a hit, affecting investment and consumer spending decisions.
However, with the US court placing a block on President Donald Trump’s tariffs, saying he overstepped the law, these challenges could ease.
“This ruling reaffirms that our laws matter, and that trade decisions can’t be made on the president’s whim,” Attorney-General Dan Rayfield said.
Still, S&P believes households are likely to “behave more cautiously” as they prioritise mortgage repayments over spending.
All of these trends are likely to keep people paying mortgages on time.
The uncertainty surrounding the global economy was a focal point for Michele Bullock in the press conference following the last interest rate cut.
Broker Daily asked Bullock whether the board was worried about borrowers taking on more debt, to which she said there was no financial stability risk.
“That’s something that, from a financial stability perspective, we always are interested in. At the moment, at an aggregate level, households are in a pretty good position. That’s not to say there’s not people out there who under stress. There are. But loan devaluation ratios aren’t too high,” said Bullock.
“Generally, people are meeting their repayments. And in fact, some people are more than meeting their repayments. They’re paying their loans off more quickly. So, our judgment at the moment is that there’s not a financial stability risk associated with this, and with interest rates coming down, provided there’s not a lot more risky lending, this actually will help households. It will actually reduce the extent to which households are under stress, and that’ll be good for financial stability.”
It could take more than two cash rate cuts to turn the dial on mortgage arrears.
However, with experts predicting further interest rate drops throughout 2025, consecutive action could have an impact.
[Related: Borrowers ‘in a pretty good position’, says RBA]
