Australian home loan arrears rose by an unusually large amount at the start of this year

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  • Australian home loan arrears rose sharply in January.
  • An increase is not unusual at this time of the year, although Standard and Poor’s says this was larger than normal.
  • It expects arrears to remain low due to ongoing labour market strength, but it is monitoring the rollover risk from some borrowers having to switch from interest-only to principal and interest mortgage repayments.

The percentage of Australians falling behind on their home loan repayments jumped sharply in January, increasing across every Australian state and territory.

According to Standard and Poor’s (S&P) latest RMBS Arrears Statistics report, delinquent housing loans contained in Australian prime residential mortgage-backed securities (RMBS) rose to 1.3% in January, a steep increase from 1.07% in December.

“Loans in arrears by more than 30 days increased in January in every state and territory,” S&P said.

“Western Australia retained its position as the home of the nation’s highest arrears… [with those more than 30 days in arrears rising to] to 2.44% in January from 2.08% in December, to reach a new record high.”

At the other end of the spectrum, arrears in New South Wales recorded the lowest level across the country at 0.98%, although that too was higher than the 0.81% level one month earlier.

As seen in the map below, arrears increased in all states and territories during January.

Source: S&P

However, before you start worrying about an imminent housing crash fuelled by “liar loans”, S&P says the substantial increase in January was not all that unusual.

“Arrears typically increase in January, reflecting the impact of Christmas spending and summer holidays,” it said, referring to overspending at the shops by some and the fact that many Australians are not managing their finances as stringently as at other parts of the year during their summer holidays.

While a seasonal pattern that’s been seen before, S&P said the scale of the increase was larger than usual, suggesting that it may have been caused by higher mortgage rates for borrowers.

“We believe the impact of incremental increases in interest rates during 2017 could be a contributing factor to the rise in mortgage arrears in January,” it said.

“We believe overall arrears could moderate in the coming months. However, it will only become evident during the next few months whether some of the loans in early arrears categories cure or migrate into more severe arrears categories due to stretched affordability constraints.”

In particular, S&P is monitoring the impact on serviceability of borrowers whose interest-only loans approaching are their expiry date.

“Lending standards for interest-only loans were less stringent before 2015,” it says.

“Interest-only loans underwritten before 2015 therefore could be more susceptible to repayment shock when the loans roll into an amortising repayment structure.”

With APRA limiting the proportion of interest-only lending to 30% of total new mortgage loans, some borrowers will be forced to switch from fixed to principal and interest repayments, potentially adding to their monthly mortgage repayments.

“Improving employment conditions will help keep defaults low, but rate rises will have an impact on borrowers,” S&P says.

“The prudence of loan underwriting standards, particularly debt-serviceability calculations, is fundamental to how well borrowers absorb these higher costs.”