Mortgage stress grows at alarming rate Lucas Baird
Non-bank lenders Victorian Mortgage Group, Pepper Money and Bluestone have some of the most delinquent mortgage books in Australia, with arrears over or near 5 per cent as rate rises exert further pressure.
The increase in delinquencies towards the middle of the year plays against trend, with arrears typically at their highest in January and February after the heavy spending Christmas period. This, according to VMG managing director Bernie McIntosh, was due to how quickly interest rates had risen in the past year.
‘‘This year is different,’’ Mr McIntosh said. ‘‘When people talk about a lag between the rate rises and when it bites, they mean that people are committed to certain levels of expenditure.
‘‘You might book a holiday 12 months in advance, but if the interest rate rises on the way there, you are still locked into those costs.’’
While borrowers typically work through any shortfalls on their repayments by April and May in prior years, arrears in VMG’s owner-occupier residential mortgage-backed securities – bundles of mortgages sold to investors, paying out interest accrued – grew from 4 per cent in January to 7 per cent in May. It represents the quickest increase in delinquencies for VMG since at least the middle of 2021. Mr McIntosh said it would get worse as recent interest rate hikes bite and more appear on the horizon.
‘‘It is going to take time for people to work through those issues, or absorb the rate rises with the lag process,’’ he said, ‘‘We are expecting another two rate rises, and borrowers haven’t felt the impact of the last two rises yet.’’
The data indicates the growing stress on borrowers and households as the Reserve Bank tightens monetary policy to tame inflation. The RBA has hiked rates 13 times in the last 14 months, and the market has priced in a one in three chance of another rise today.
The rapid increase in interest rates has also given rise to concerns of ‘‘zombie mortgages’’ – with borrowers tak-Mr McIntosh said borrowers would start to substitute expensive items, like overseas holidays, for less expensive alternatives such as domestic trips. He thought the economy was still in a good condition, with borrowers well-placed to manage through stress as long as unemployment was weak.
But VMG is far from the only lender ing on too much debt when rates were low and unable to afford repayments now. Bankers are also starting to see a slowdown in spending as more cash is diverted towards repayments.
Lendi, a mortgage broker, thinks two in five borrowers will be under water on their monthly budgets if lenders pass on the cost of two more rate rises. seeing the arrears rise substantially. Bluestone’s RMBS arrears for owner-occupiers have hovered around 4.5 per cent since the start of the year, but this is down from the more than 8 per cent arrears rate in mid-2021.
At ASX-listed Pepper Money, arrears were up to 4.5 per cent in May from 3.4 per cent in January.
A Pepper Money spokeswoman said this was ‘‘in line with the historical average of the portfolio predating COVID-19’’, and that its portfolio was uniquely exposed to rate rises because it only lent on variable rates.’’
Of the majors, National Australia Bank owner-occupier arrears are the highest at 1.4 per cent. Commonwealth Bank is around 1 per cent, and ANZ 0.98 per cent. Westpac was not captured in the compilation. On a regional basis, RMBS for home loans in the Northern Territory were the worst performing with arrears above 2.4 per cent. S&P last month said the most delinquent suburb Australia-wide was Katoomba in the Blue Mountains, with arrears in the area as high as 5.6 per cent.
