Savings buffers are being eaten away and the most exposed borrowers are well and truly in trouble, an S&P Global webinar on mortgage arrears in Australia heard yesterday.
“In the outer fringes of Melbourne and Sydney, the larger cities, arrears are typically higher for recent and first home buyers,” said Erin Kitson, director of structured finance ratings at S&P.
“These are the borrower cohorts we watch.”
They will most likely also be self-employed. Sole traders and small business owners account for 70 per cent of non-conforming loan pools. Self-employment represents similarly around 70 per cent of borrowers in outer suburbs.
“Recent and first home buyers, typically with higher debt relative to income, interest rate increases are more likely to directly translate ...they are more predisposed [to arrears],” Kitson said.
Still, RMBS arrears have not really begun to rise yet, and S&P are not fretting as much as some, given resilience in the labour market and the low unemployment rate in Australia.
Unemployment is a key cause of mortgage defaults.
“There is also a frenzy in refinancing activity,” KItson said.
“This also temper arrears and borrowers self-manage their own way out of stress.”
S&P are wary of their own arrears data.
“Arrears are a lagging indicator. We have not seen the full impact of multiple rate rises so far,” Kitson said.
A more potent indicator may be what’s happening with the paid way in advance and simply paid in advance cohorts that the RBA have made so much about for years now.
“At a broader level buffers are still there and they have been eroded,” Alisha Treacy, another S&P director said.
“Those buffers are finite and are certainly being worked through.”
On the better known buffer – the one applied to loan serviceability assessments – lender practice is becoming uneven.
For non-banks they have observed, interest rate buffers are set at 2.5 per cent or 3 per cent, S&P said. A small number of lenders have recently announced that they may approve refinance loans with an interest rate buffer that is as low as one per cent.
More recently, seen some non-bank lenders reduced their interest rate buffers for all loan products – not just refinance loans - down to two per cent.