Australian RMBS home loan delinquencies to rise moderately over 2018: Moody's

Australian RMBS delinquency rates will rise moderately over coming quarters, with high debt levels and higher interest rates putting pressure on mortgage borrowers, according to the latest RMBS report from Moody's.

This is despite delinquency rates being broadly stable over the three months ended 30 June 2018.

The 30+ day delinquency rate for prime RMBS was 1.52% in June 2018, compared with 1.5% in March 2018 and 1.6% in June 2017.

For prime RMBS issued by major banks, the 30+ day delinquency rate was 1.58% in June 2018 compared with 1.57% in March.

For regional banks, it remained flat at 1.99%, while for prime RMBS issued by other authorised deposit-taking institutions, the delinquency rate was 0.57% in June, compared with 0.51% in March.

The 30+ day delinquency rate for non-conforming RMBS was 3.16% in June 2018, compared with 3.05% in March 2018 and 3.41% in June 2017.

Moody's noted, "over coming quarters, we expect delinquencies to increases moderately, given Australia's record-high household debt, which amounts to 190% of annual gross disposable income."

High debt increases the risk of delinquencies, especially in a rising interest rate environment.

The report stated, "in late August and September, a number of Australia's major banks raised home loan interest rates, though we do not expect this round of rate rises to result in a significant increase in mortgage delinquencies, given that labour market conditions remain favourable and the rate increases were small compared with buffers built into home loan serviceability assessments."

A large number of interest-only mortgages are due to convert to principal and interest loans over the next two years, which will contribute to an increase in delinquencies over this period, according to Moody's data.

Banks originated a significant volume of interest-only loans in 2014 and 2015.

The five year interest-only period for these mortgages will end in 2019 and 2020.

The report also stated, "when interest-only loans convert to principal and interest, borrowers have to make higher monthly repayments, which can lead to delinquencies."

"On the positive side, economic and labour market conditions in Australia will continue to support borrowers’ ability to meet mortgage repayments over the next year, meaning that the increase in delinquencies will be moderate," they suggested.

Moody's forecasts real GDP growth of around 2.9% for calendar 2018 and 3% for 2019.

Australia's unemployment rate was 5.4% in June and we expect it will remain relatively stable at 5.6% by the end of 2018 and 5.5% at the end of 2019