The Federal Reserve says more borrowers are defaulting on their mortgages, and home loan delinquency rates are expected to rise further.
The proportion of borrowers who are more than 30 days behind on their mortgage payments has risen over the past two years as interest rates have risen, a new report from the Reserve Bank of Australia says.
The central bank cited “challenging macroeconomic conditions” as the main driver of the rise in arrears, including higher interest rates and lower real wages.
Higher interest rates lead to higher home loan arrears
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Home loan arrears rates, homeowners. Source: Reserve Bank of Australia
Home loans are classified as delinquent when borrowers have defaulted on the minimum payment due, but are still expected to return to full repayment of their loan.
This is different from default, which occurs when a borrower is no longer expected to repay their loan in full.
The recent rise in arrears comes from low levels, having bottomed out before the current rate tightening cycle.
“While arrears rates remain around pre-pandemic levels, banks expect them to rise slightly thereafter,” the report said.
Sharp rise in delinquency rates on riskier loans
Source: Reserve Bank of Australia. Shaded area indicates structural break.
According to the report published in the Reserve Bank of Australia’s quarterly bulletin, arrears rates are higher for riskier loans, including borrowers with higher loan-to-value (LVR) and loan-to-income (LTI) ratios and lower-income borrowers.
The percentage of loans with high loan-to-value ratios (above 80%) that are more than 90 days past due has risen sharply to around 2.5%, up from less than 1% in late 2022.
“Highly leveraged borrowers are more likely to default from 2022, consistent with their generally higher arrears rates and greater exposure to difficult economic conditions,” said the report, by RBA analysts Ryan Morgan and Elena Ryan.
High interest rates have slowed demand as borrowers spend a larger proportion of their income on mortgage payments. Photo: Eugene Hyland
People who borrowed when interest rates were higher, as well as new first-home buyers, were also perceived to have a greater likelihood of defaulting, the report said.
“Looking ahead, household budget pressures are expected to remain elevated for some time, but may ease slightly as inflation slows further.”
Despite the difficult economic situation, the RBA still expects the majority of mortgage holders to continue repaying their mortgages.
“Almost all borrowers are expected to be able to continue servicing their debt even if budget pressures remain high for a prolonged period,” the report said.
RBA cash rate ‘very blunt instrument’
The Reserve Bank of Australia has raised cash rates 13 times since May 2022 in an attempt to return inflation to its target range of 2-3%.
When the money rate rises, interest rates on home loans and savings also rise, which is intended to discourage people from spending to help lower the prices of goods and services.
The Federal Reserve says “challenging macroeconomic conditions” are the main driver of rising home loan arrears.
According to the Reserve Bank of Australia’s latest monetary policy statement in May, raising cash rates has slowed demand, as borrowers now need to contribute a larger share of household income to loan repayments.
“Higher household debt payments have put pressure on household budgets and contributed to weaker consumption growth.”
The consumer price index, a measure of household inflation, peaked at 7.8% in the first quarter of December 2022, before declining to 3.6% by the first quarter of March this year.
Inflation is expected to reach the target range of 2-3% by late 2025, before stabilising at 2.6% by June 2025, according to the Reserve Bank of Australia.
According to the Reserve Bank of Australia, mortgage arrears rates are higher for highly leveraged borrowers. Image: Getty
Chief Economist at PropTrack Paul Ryan He said the cash rate adjustment had a “very uneven impact” across the economy.
“It can be a very imprecise tool. There is one interest rate that affects all people in the economy and all parts of Australia at the same time,” he said.
National Australia Bank chief economist Alan Oster said raising interest rates to bring down inflation had been successful, but the RBA was “trying to walk a very fine line” of slowing the economy without “crushing it”.
“The adjustments they made to cash interest rates have started to slow inflation,” he added.
You can say at the top of town, [it’s had] No effect.
“But the net effect was actually the effect they wanted and it slowed the economy dramatically.”
low housing affordability
Another result of higher interest rates was that low housing affordability“Mr. Ryan said.
“Mortgage rates are the main gateway to people’s ability to afford housing,” he said.
“Higher mortgage rates are reducing borrowing capacity in the housing market in particular.”
Although borrowing capacity has fallen by about 30% since interest rates began to rise, home prices have continued to rise in most parts of the country.
Median home values nationwide hit all-time high in JuneWith population growth and new construction slowing, demand for available homes is increasing.
“We are currently experiencing the most difficult affordability conditions in at least 30 years,” Mr. Ryan said.
“The last time we had really tight affordability conditions was around 2008, which wasn’t surprising, and the last time we had really high mortgage rates.”
