13 Sep 2010

Borrowers Keep on Top of Mortgage Repayments

The ability of Australian borrowers to pay down their mortgages – as measured by delinquency rates – stabilised in the June quarter.

A new report by Australian RMBS: Moody’s Investors Service reveals that prime mortgage delinquencies greater than 30 days were steady at 1.39 per cent in the June quarter, compared to 1.34 per cent in March.

“Borrowers in outer south-western Sydney and Fairfield-Liverpool are experiencing greater payment difficulties in comparison to those in other regions,” says Arthur Karabatsos, a Moody’s VP/Senior Analyst for the Structured Finance Group in Sydney.

“These two regions feature the highest proportion of mortgage delinquencies, with 2.5 per cent to 3 per cent of loans falling into arrears of 30+ days past due.

“If current official interest rates hold we don’t expect significant pressure on delinquency levels. If they were to increase beyond these ‘neutral’ levels – that is, neither stimulating nor constraining the economy – delinquencies may rise, although we don’t expect to witness the 1.63 per cent seen in January 2009.”

Reserve Bank of Australia (RBA) governor Glenn Stevens said that interest rates were sitting at around their average levels of the past decade.

“Credit outstanding for housing has slowed a little over recent months, and the upward pressure on dwelling prices appears to have abated,” he said in a statement this week.

Moody’s expect stable delinquency to continue for the rest of 2010 and into 2011. Factors influencing this include:

  • Interest rate increases should be manageable for borrowers who have recently obtained mortgages as borrower serviceability is generally assessed at a stressed interest rate, typically 1.25 per cent to 2 per cent above the actual required payment rate. (Australians still prefer to take a gamble with rising interest rates, with just 3.9 per cent of buyers in August fixing their mortgage loan.)
  • Many households are prepaying their mortgages. In fact, the major banks are reporting that over 55 per cent of borrowers are ahead on their payment schedules, with 40 per cent more than a year ahead.
  • The resilient labor market (5.2 per cent unemployment rate as at June 2010) will continue to support household income and limit delinquencies and defaults.
  • Although house price appreciation has slowed, the undersupply of housing stock, as evidenced by the prolonged disparity between population growth and housing completion growth, should act as a floor to a significant decline in market value.

Other factors influencing stable delinquency expectations through 2010 include:

  • Current housing market conditions still permit heavily delinquent borrowers to sell their properties, minimising magnitude of default events.
  • Loan seasoning and demonstrated serviceability of existing borrowers should act to absorb modest future increases in interest rates.

The Genworth Homebuyer Confidence Index (GHCI) – a measure of borrower and would-be borrower sentiment based on consumer attitudinal data collected by Genworth Financial over the last five years – shows that homebuyer confidence is back to pre-Global Financial Crisis levels; however, cautious optimism should prevail, with a number of signals suggesting confidence is on a delicate balance and contra

“Higher levels of employment, lower interest rates and government stimulus helped first homebuyers to meet their mortgage repayments over the past year,” said Genworth Acting CEO, Paul Caputo.

“If employment continues to improve however, this will put pressure on inflation and, in-turn, current interest rate levels.”

While most borrowers have comfortably met their mortgage repayments, rising interest rates and the rising cost of living are a key concern for homebuyers.

The GHCI shows the proportion of respondents who expect to experience repayment difficulties in the next 12 months has jumped from 15 per cent to 20 per cent over the past year.

Of these, the amount blaming the rising cost of living has increased to 61 per cent from 48 per cent in 2009, while 61 per cent also nominated interest rates.

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