Home loan delinquencies declined over the past quarter and are set to continue falling in response to rate cuts, according to S&P.
S&P Global has reported that over 30-day arrears underlying Australia’s residential mortgage-backed securities (RMBS) declined over the three months to 30 September, from 1.51 per cent in the June quarter to 1.36 per cent.
Arrears fell across all states and territories, with Western Australia recording the sharpest improvement (26 bps).
However, overall, delinquencies remain highest in Western Australia (2.79 per cent), followed by the Northern Territory (2.69 per cent), Queensland (1.71 per cent), South Australia (1.43 per cent), Victoria (1.26 per cent), Tasmania (1.22 per cent) and NSW (1.21 per cent).
According to S&P, mortgage rate reductions in response to the Reserve Bank of Australia’s cuts to the cash rate will continue to place downward pressure on delinquencies.
“We expect mortgage arrears to continue to decline as lower interest rates continue to filter through to underlying loan portfolios, which are mostly variable rate mortgages,” the ratings agency noted.
S&P added that an improvement in refinancing conditions would also assist borrowers in meeting their mortgage repayments, with borrowers increasingly switching products to secure a lower rate.
Further, S&P reported that prime prepayment rates also improved over the September quarter, increasing from an all-time low of 13.3 per cent in June to 17.7 per cent.
An improvement in refinancing conditions was also attributed to the increase in prepayment rates.
S&P concluded by noting the risks to credit quality, which include prolonged drought conditions across Australia’s regional markets that could “keep arrears elevated”.
S&P added that subdued economic conditions and slow wage growth could also continue to weigh on debt serviceability for some borrowers “at the margins”.
However, according to the ratings agency, stable employment conditions would underpin low default rates and support its stable outlook for the sector.
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