Rising mortgage arrears rates in outer-suburban Sydney and Melbourne are exposing growing pressure on younger and recent home buyers.
Mortgage arrears in outer-suburban Sydney and Melbourne are exposing growing pressure on younger and recent home buyers, with credit ratings agency S&P Global Ratings identifying repayment hotspots where falling property values are also squeezing refinancing options.
Pakenham, in Melbourne’s outer south-east, has the highest reported share of loans at least a month overdue, at 2.99 per cent, compared with 0.85 per cent nationally.
Its arrears rate is approximately three-and-a-half times the national figure.
The findings follow four interest rate increases this year, with the Reserve Bank of Australia (RBA) lifting the cash rate by 25 basis points to 4.60 per cent on 29 September.
S&P’s director of structured finance Erin Kitson said younger borrowers’ larger debt burdens and limited opportunities to accumulate savings left them particularly exposed.
“The debt relative to income for, particularly, younger borrowers that buy in these areas is higher, just because they’re younger, and they haven’t had the same period of time to build up savings,” Kitson said.
The agency said that first home buyers (FHB) carrying substantial mortgages relative to their incomes were particularly stretched, while buyers who entered near the market peak faced additional difficulties as property values declined.
Falling values narrow refinancing options
Pakenham’s median property price has declined 1.8 per cent over 12 months to $735,000.
The suburb also sits within a Melbourne area with the largest proportion of properties advertised for more than six months.
In Sydney’s west, Constitution Hill recorded arrears of 2.4 per cent, alongside a 10.5 per cent annual price decline to a median of $1.3 million.
Baulkham Hills, in Sydney’s north-west, had 2.3 per cent of mortgages in arrears, with values down 13 per cent to $1.7 million.
Kitson said purchasing near the market peak could compound repayment difficulties by weakening borrowers’ ability to secure relief through refinancing.
“People who’ve bought at the peak of property markets as well, that can also make falling into arrears a more real possibility because one of the things that enables borrowers to move out of mortgage stress or alleviate cash flow pressures is being able to refinance onto a better mortgage rate,” Kitson said.
She said declining equity could make securing more competitive refinancing terms increasingly difficult, even before borrowers’ loans exceeded their properties’ values.
“The more that your equity is reduced because of falling property prices, it’s harder to get a good deal on refinancing,” she said.
Households weigh their options
KPMG analysis identified Victorian mortgage holders as devoting the largest share of income to mortgage commitments among the states.
The consultancy firm’s urban economist Terry Rawnsley said households facing tighter finances would consider several ways to manage their commitments.
“I think there’s a whole range of different levers that people will be pulling,” Rawnsley said.
“They will be cutting back on spending, trying to get more income coming through the door, changing to interest-only loans, or selling the house and trying to downsize.”
Despite the localised pressures, S&P identified low unemployment as a factor limiting broader mortgage-market problems.
The RBA’s October Financial Stability Review also distinguished vulnerable borrowers from the wider market.
Fewer than 1 per cent of borrowers were estimated to be in negative equity, where their mortgage exceeds their property’s value.
Yet its modelling suggested that around 5 per cent of mortgages would enter negative equity following a further uniform 20 per cent fall in housing prices.
[Related: Over 80% of brokers report investor inquiry plunge]
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