Fitch: Rate cut won’t improve mortgage performance

Just in from Fitch Ratings:

Fitch Ratings says that the Reserve Bank of Australia’s move on 3 February 2015 to cut its official interest rate to 2.25% down from 2.50%, which led to mortgage rates in Australia falling to their lowest point in 50 years, is unlikely to improve the performance of domestic residential mortgage loans.

Australian variable interest rates have tracked well below historical levels for a long time, and there is little room for further improvement in mortgage performance in terms of loan defaults and delinquencies. Fitch data shows that the current delinquency rate of loans that are more than 30 days past due (a measure of borrowers who have missed one or more payments) on residential mortgages is now just 1.08%, the lowest recorded since December 2007.

Financial distress is one of the key factors that borrowers cite when they default on mortgages. However, interest rates are already at low levels, while household finances have improved following lower petrol prices, both of which mean that now is one of the least likely times for borrowers who remain employed, to be unable to pay. Fitch is of the view that a 25bps cut in rates will have no impact on mortgage performance.

Any defaults in the current environment will be due to other key factors such as sickness, business bankruptcy and divorce, which are unaffected by interest rates. Fitch remains vigilant for over-commitment of borrowers and poor underwriting in the mortgage market, although there is little evidence of such practices now.

Fitch currently rates 139 Australian residential mortgage backed securities (RMBS) transactions and five covered bond programmes which include over 1.4 million individual housing loans as collateral. These loans represent approximately 18% of the Australian housing loan market and so provide a good proxy for the market as a whole.

Comments

  1. Does this include the fact that borrowers can now borrow 10% more (interest only) – as I am certain most will? Surely higher principle/borrowings is considered higher risk?

    • Unemployment is spiking, budget emergency, capex cliff, “HEY LETS POST DATA THAT ONLY BACKS OUR POSITION THAT RATES SHOULD BE LOWER”….

      Right – good one.

    • Andy if a borrower opts for an interest only option it actually decreases their serviceability so the potential loan amount is reduced.

      • How’s that work Pete? A 10% reduction in rate surely leads to a commensurate increase in the amount that can be borrowed?

  2. “Rate cut won’t improve mortgage performance”

    Bingo! But it has already increased house prices.

    • So if its not improving performance is must be impeding performance or even more unlikely doing nothing.

      Impeding future performance when rates rise and the boys toys factored into home loans become worthless.

      The bust however still seems a long way out.

  3. Just got our land valuation.
    When we first moved here, our first val (10 acres) saw increase of 20% – regional area, no chance of subdividing, 12 from nearest town (7000 pop, 20 mins from Lismore, Ballina), no sewerage, no reticulated water, only broadband is wireless.

    This time, minus 8%. House prices (I used PriceFinder) in our area (median), up 80%. Makes for interesting times.

    • Well good for you, your local rates should decrease.

      Valuer General valuations are not market valuations and often bear no resemblance to market valuations. I wouldn’t worry about it if I was you.