Home loan arrears showing few signs of COVID scarring

The coronavirus crisis has had little effect to date on debt serviceability in Australia despite an expected deterioration in economic conditions while lockdowns persist. 

This is the view of ratings agency S&P Global Ratings who said the resilience of household balance sheets, bolstered by government stimulus measures and low interest rates, has enabled many borrowers to build up repayment buffers, cure prior arrears positions, and stay on top of their mortgage repayments. 

“Strong property prices have also enhanced refinancing options for many borrowers by boosting equity positions in their home loans,” the ratings agency said in a new report, adding that refinancing is a common way for borrowers to self-manage their way out of arrears. 

However, S&P expects the lockdowns gripping New South Wales and Victoria will crimp economic activity, with many businesses shuttered.  

However, the impact on debt serviceability will be sector specific. the ratings agency said. 

“Self-employed borrowers in affected areas and industries are more sensitive to cash flow pressures caused by loss of income compared with full time, pay-as-you-go employees, who can continue to work remotely with minimal effect on household income. 

“This will put some pressure on arrears for self-employed borrowers, and more so in the non-conforming sector, where such borrowers are more highly represented.” 

RMBS index shows arrears fall 

The good performance by Australian borrowers is underlined by S&P’s performance index which revealed that arrears for Australian prime mortgages fell to 0.90 percent in June from 1.15 percent the same month a year earlier.  

The rating agency said while some borrowers have transitioned from mortgage deferrals to formal hardship programs in the second quarter, it has not had a noticeable effect on overall prime RMBS arrears performance.  

“This is because it has been offset by fewer new borrowers entering into arrears thanks to low interest rates.” 

Prepayment rates also bear testimony to the competitive lending environment and refinancing options available, with prime and nonconforming prepayment rates increasing in the second quarter and year on year. 

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