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ISCOVER
Consecutive interest rate rises have hit low doc borrowers hard and fast
By: David Carroll
Director
Fitch Rating
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The swift reversal of the expansionary monetary policy was the defining economic development of Q409, as the RBA set about increasing the target cash rate each month during the quarter.
Each increase was 25 basis points, bringing the target cash rate to 3.75 per cent by quarter’s end.
There was a slight improvement across the prime/conforming Dinkum Index over Q409, with 30+ day delinquencies decreasing to 1.19 per cent in Q409, from 1.21 per cent in Q309.
The reduction was in part due to the index constituent methodology, as there were five new RMBS issues added to the Index during the quarter.
There was an increase in low doc 30+ day delinquencies to 4.82 per cent in Q409, from 4.72 per cent in Q309. This increase in low doc 30+ day delinquencies can primarily be attributable to a 28 per cent increase in 30-59 day delinquencies (to 1.75 per cent in Q409 from 1.37 per cent in Q309).
This spike in 30+ day arrears can partially be attributed to seasonal Christmas credit spending, as well as the increase in interest rates during Q409. In the 90+ day arrears bucket, there were declines for both the prime/conforming Dinkum Index and the Low Doc Dinkum Index; these declines were supported by an increased ability to sell properties, as residential house prices generally increased across Australia as 2009 progressed.
With the RBA, having increased interest rates twice in early 2010 and an expectation that further increases will occur during 2010, borrowers will face upward pressure on their debt servicing capacity.
For low doc borrowers, the effect of the interest rate increases is expected to hit harder and quicker; this is because the interest rate reprieve for this class of borrowers through 2009 was not as significant as for prime/conforming borrowers.
Fitch anticipates an increase in arrears for both conforming and low doc borrowers during 2010 as compounding interest rate rises impact borrowers and flow through to rises in Fitch’s Dinkum indexes.
Helping to offset the potential impact of interest rate increases is the anticipated continued strength of the Australian economy which should prevent any significant rise in unemployment which is a key driver of borrower’s ability to service their mortgages.
