Moody's forecasts payment shock for Australian IO mortgage holders

Moody's forecasts payment shock for Australian IO mortgage holders
Moody's forecasts payment shock for Australian IO mortgage holders
Moody's Investors Service says that mortgage delinquencies will increase over the next two years.
 
The forecasts suggests a record number of interest-only (IO) mortgages converting to principal and interest (P&I) loans, will continue to the rise.
  
When IO loans convert to P&I, borrowers have to make higher monthly repayments, and this 'payment shock' can lead to mortgage delinquencies and makes IO loans riskier than P&I loans. 
  
Moody's data shows that the 90 days past due delinquency rate for mortgages that have converted to P&I from IO is 0.94%, double that of IO loans that have not yet converted and 0.24 percentage points higher than all securitised mortgages. 
 
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Moody's forecasts payment shock for Australian IO mortgage holders
  
Refinancing interest-only mortgages is also becoming more difficult, which will in itself contribute to an increase in mortgage delinquencies. 
  
Moody's conclusions are contained in its just-released report, "RMBS - Australia Mortgage delinquencies to increase as record number of IO loans to convert to P&I". 
  
Banks in Australia originated a significant volume of IO loans in 2014 and 2015, which means a record number of these loans are scheduled to convert to P&I over 2019 and 2020, when their five-year IO period ends. 
 
Click here to enlarge: 
Moody's forecasts payment shock for Australian IO mortgage holders
  
IO loans accounted for more than 40% of all mortgages originated by banks for much of 2014 and 2015, with this figure peaking at 46% in June 2015. 
  
At current mortgage interest rates, monthly repayments on loans that convert to P&I from IO will increase by around 30%, which can lead to delinquencies. 
  
With RMBS, IO loans accounted for around 32% of all loans in such deals on average as of November 2017. However, on an individual deal basis, the share of IO loans ranges from 0% to 50%. 
 
Click here to enlarge:
Moody's forecasts payment shock for Australian IO mortgage holders
  
"Therefore, the degree to which individual deals will be exposed to potential delinquencies as loans convert to P&I from IO will depend on each deals' exposure to IO loans and their IO period maturity profile," the report noted.
 
Tags: 
Loans And Mortgages Rmbs

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