How are mortgage deferrals trending?
S&P’s detailed look at mortgage deferrals highlights that while deferrals are falling, arrears has been trending upwards.
The increase in arrears, driven by scaling back of fiscal support and the expiry of mortgage deferrals is only at the margin, according the S&P.
In fact the rating agency’s quarterly report on the residential mortgage backed sector highlights a robust outlook underpinned by a solid housing sector.
“Low interest rates, increasing property prices, and strong refinancing conditions for borrowers of a good credit quality bode well for the continued strong performance of the Australian RMBS sector,” S&P director Erin Kitson said.
In its assessment, S&P highlights that the level of deferrals has fallen across the industry.
The data shows that mortgage-deferral levels continue to decline as the economy reopens.
According to the report, mortgage-deferral levels will plateau as most borrowers who could resume their repayments have already exited such arrangements.
But for borrowers who are still under mortgage-deferral arrangements, they are likely to be facing longer term more permanent debt-serviceability pressures.
Based on feedback from lenders, Kitson expects around 10 per cent -15 per cent of mortgage deferrals - based on May-June peaks - to transition to formal hardship arrangements.
Here, she sees lenders adopting different approaches to transitioning loans off mortgage-deferral arrangements.
For example, some lenders may allow these borrowers to continue with paying off only the interest portion of their loans. Other lenders could also opt for extending the duration of the loan.
“We expect debt-serviceability pressures to meaningfully surface after March 2021, when mortgage-deferral periods formally expire,” Kitson said.
In terms of the level of arrears, S&P notes that since the pandemic, inner-city areas have experienced some of the greatest increases in arrears, albeit off low levels.
Furthermore, refinancing conditions are likely to be more difficult for investors with properties in inner-city locations, adding to debt-serviceability pressures.
However, most RMBS transactions are geographically well diversified so the exposure to these locations in most transactions is insignificant.