An increase in loan arrears in the first quarter of 2023 is being felt by some brokers and customers more than others, but the situation will only get worse, says Tanya Sale, the CEO of broker aggregator outsource Financial,
S&P Global Ratings reported yesterday that prime mortgage arrears rose to 0.95% in March 2023, up from 0.76% in December 2022, while non-conforming arrears hit 3.7% in March, up from 3.2%.
The ratings firm said the results showed that the cumulative effect of multiple interest rate rises were taking effect, with borrowers’ savings buffers eroding as the cost of living rose.
S&P Global Ratings’ report, RMBS Performance Watch: Australia – Market Overview Q1 2023, suggested refinancing conditions have tempered arrears by enabling many borrowers to switch to lower mortgage rates, reducing stress.
Sale (pictured above left) said the increase in arrears should concern the broking industry and it mean that mortgage stress was indeed starting to take place in the market.
“It is not all doom and gloom, because brokers, our industry as a whole, is working very hard on this, and we are working closely with clients before they get into an arrears situation,” Sale said.
“But I always said that it was going to happen. It was never going to be all bright and sunny days when borrowers are feeling the impact of 11 rate increases.”
Sale said some of outsource Financial’s broker customers had felt the impact of interest rate hikes since 2022.
“There are brokers who haven’t felt the impact yet, and there are brokers in situations where they have already felt it a lot,” she said. “But they are working really closely with their clients to get them through this. That is what we have to do as an industry, is get consumers through this.”
Fixed rate loan expiries to make situation worse
The expiry of cheap fixed rate loans means “it is going to get worse before it gets better,” Sale said.
“We’ve seen some of these cheap fixed rate loans coming off in March and April, but that is only one component – there will now be a domino effect right into September and October,” she said.
While there is talk of good refinancing months, there will also be challenging customer situations.
“What about the ones that want to refinance and unfortunately can’t because the property market has gone down so the value of their property has gone down? They are at a standstill,” Sale said.
“That is where brokers must work with clients to go back to their existing lenders. They really need to try and get ahead of the game before arrears start kicking in.”
Sale said outsource Financial had done a lot of training and education with member brokers focusing on how they could assist and communicate with their clients through this period.
“We wanted to support them to ensure they are on top of this ahead of time,” she said.
Employment rate to support borrowers
Ray Ethell (pictured above right), managing director of Non Conforming Loans, said he was not yet concerned about the uptick in non-conforming arrears levels, which still remained at less than the 10-year average.
The 10-year average for non-conforming mortgages is approximately 4.5%, while during the financial crisis period in 2008 and 2009, non-conforming arrears rose to as high as 17%.
“Arrears levels are dependent on the employment rate,” Ethell said. “What we know is that when there is high employment, people make sure that they pay their mortgages and rentals and then live off the rest.”
“If there is a period of high unemployment, people may need to look after themselves first, and that’s when things like the mortgage can fall apart. So while there is a high level of employment, you will not have major arrears issues in non-conforming or prime mortgages.”
Ethell said that he was not anticipating a major shift in the next couple of years.
“There may be a bit more to come off, but unless there is some major event or something like that in the near future, then it will remain relatively strong,” he said.
However, Sale said “there will be ones that unfortunately we probably cannot save”.
“There will be situations in months ahead where we will hear bout mortgage stress, and people in certain areas may leave their homes, because they can’t afford to pay any more,” she said.
“When they sell their houses might be valued lower than when the bought. We won’t be isolated from sad stories, but if we can minimise it that will be a good outcome.”
