Fitch’s latest Dinkum RMBS Index shows 30-day arrears in Australian prime RMBS portfolios rising by 16 basis points to 98 bps in the March quarter, and 90-day arrears rising 8 bps to 46 bps.

Fitch said these increases are from record low levels in 2022 and arrears usually increase in the Mach quarter because of Christmas spending.

However, the rise indicates that “borrowers are beginning to face stress” from inflation and multiple interest rate hikes.

The ratings agency said: “Fitch expects the Reserve Bank’s cash rate hikes to drive up arrears in 2023, due to the high ratio of household debt to disposable income, reduction in household savings and dominance of floating-rate loans.

“Mortgages written between 2019 and 2021, when banks tested serviceability using a buffer of 2.5 per cent above the borrower’s interest rate, are more susceptible to deterioration in performance as the cash rate now exceeds this buffer.”

The loss rate in prime RMBS portfolios was stable in the March quarter, at 0.004 per cent annualised. The loss rate has been stable for the past five years.

Arrears in non-conforming RMBS portfolios rose 32 bps to 3.28 per cent for 30-day arrears, and by 45 bps to 1.09 per cent for 90-day arrears.

“Non-conforming borrowers have worse credit histories and may be more exposed to interest rate hikes as their mortgages carry higher rates.”

Fitch said worsening arrears are not expected to affect structured finance ratings because deleveraging from the paydown of transactions will improve credit enhancement more quickly than any worsening credit quality.