Half of borrowers ahead on mortgage payments: Morningstar and ING Direct

The huge competitive advantage the four major banks already enjoy in the mortgage market is being boosted by borrowers getting ahead on their mortgage repayments.

On average more than one in two (56%) borrowers who have their loan with a major bank are ahead on their mortgage repayments, according to research by Morningstar.

A large proportion of these would be variable-rate mortgage holders who have continued to pay off their loan at the same amount, despite interest rates falling since November 2011.

The Commonwealth Bank, Australia’s largest mortgage lender, has the most diligent borrowers with more than two-thirds (69%) ahead on their mortgage repayments.

Second best is Westpac (59%) followed by ANZ (49%) with NAB the laggard at 45%.

“Recent interest rate cuts will increase home loan prepayment rates and provide the banks with an even stronger buffer against future loan loss risks,” says Morningstar financial services and property market analyst David Ellis, who compiled the report.

The latest quarterly ING Direct Financial Wellbeing index also found around one in two households (49%) are ahead on mortgage repayments - the highest proportion since the bank began tracking this figure in mid-2010.

The proportion of households ahead with their repayments is highest in Queensland (58%) and Victoria (57%).

The survey, based on an early January Galaxy Research online survey of over a 1,000 households, also found that 93% of home owners are ‘comfortable’ with their loan, with 64% saying they are ‘very’ comfortable - the highest level since tracking began.

The Morningstar report also looked at loan to value (LVR) ratios of the major banks, which are in a range from 44% to 56%, indicating most borrowers have built up strong financial buffers.

The Commonwealth Bank again rates highest on this measure with an impressive loan to value (LVR) ratio of just 44% with NAB the highest at 56%.

In addition, Morningstar found that the mortgage books of the major banks are also being boosted by improving arrears rates.

“Arrears rates continue to improve with home loan 90-plus day arrears trending down from a four bank average of 0.61% of the total loans outstanding at September 2011 to 0.52% at September 2012,” says Ellis.

All of these factors – borrowers’ propensity to get ahead on mortgage repayments, low LVRs and declining arrears – will provide insulation in the unlikely event of a significant financial shock.

Ellis says a sharp deterioration in credit quality is the major risk to earnings growth, particularly if the economy slides into recession, but ranks as a low possibility.

“Tight credit risk standards limit potential damage, but a sharp increase in business loan losses similar to GFC highs in 2009 will damage earnings, dividends and investor confidence.

“We do not see any material loan loss risks in the residential portfolios of the major banks and at this early stage of the 2013 financial year and overall credit quality remains sound,” says Ellis.

He also says the housing market has stabilised following moderate house price declines in 2011 and early 2012, though “we still expect a slow grind down till 2015”.