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Mortgage portfolio ‘deteriorating’ as credit crunch persists

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Reporter 1 minute read

Delinquencies underlying Australia’s residential mortgage portfolio are continuing to climb as tighter lending practices continue to inhibit switching, research from S&P has revealed.

According to S&P Global Ratings’ latest quarterly RMBS report, over 30-day arrears underlying Australia’s residential mortgage portfolio increased to 1.51 per cent in the three months to 31 March 2019.

S&P attributed the increase to growing debt serviceability pressures “in the margins”, reflected in a decline in repayment rates, which dropped from 5 per cent in the quarter ending 31 March 2018 to 4 per cent.

S&P stated that the portfolio “deteriorated” as a result of tighter lending conditions, which have inhibited some borrowers from easing repayment pressures by refinancing their home loan.

The ratings agency observed that while political, regulatory and economic developments could lift confidence in the sector, it is unclear whether such developments would improve credit quality.     

“Positive announcements such as the official rate cut on June 4, proposed prudential changes to the use of interest-rate floors, and greater policy certainty around property-related taxes should improve sentiment,” S&P noted.

“We are uncertain of the extent to which these actions will affect mortgage arrears, particularly those in the more advanced stage, which continue to reach new highs.”

Moreover, S&P expects weakening economic conditions to “keep arrears elevated for some time” and refinancing challenges to “continue to hold down prepayment rates”.

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However, it said that it does not expect to revise the ratings performance of the Australian RMBS portfolio.  

“As long as employment conditions remain stable, however, we believe rating performance will not be affected,” S&P stated.

“The strong credit support available in most transactions provides a reasonable level of resilience to weather some economic headwinds.

“The generally high seasoning levels in the sector also demonstrate a sound track record of repayment for most borrowers.”

[Related: RBA urged to ‘leave fuel in the tank’]

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Mortgage portfolio ‘deteriorating’ as credit crunch persists
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