Extended lockdowns to put pressure on home loan arrears for self-employed borrowers: S&P
COVID-19 has had little effect to date on debt serviceability in Australia, according to the latest RMBS Performance Watch: Australia.
The Standard & Poor's Performance Index (SPIN) found Australian prime mortgages arrears fell to 0.90% in June from 1.15% the same month a year earlier.
It noted the resilience of household balance sheets, bolstered by government stimulus measures and low interest rates, has enabled many borrowers to build up repayment buffers, cure prior arrears positions, and stay on top of their mortgage repayments.
"Strong property prices have also enhanced refinancing options for many borrowers by boosting equity positions in their home loans," it noted adding that financing is a common way for borrowers to self-manage their way out of arrears.
While some borrowers have transitioned from "mortgage deferral 1.0" to formal hardship programs in the second quarter, it has not had a noticeable effect on overall prime RMBS arrears performance.
Rise
"This is because it has been offset by fewer new borrowers entering into arrears thanks to low interest rates.
"Prepayment rates also bear testimony to the competitive lending environment and refinancing options available, with prime and nonconforming prepayment rates increasing in the second quarter and year on year.
The report acknowledged the lockdowns gripping New South Wales and Victoria will crimp economic activity, with many businesses shuttered.
"The impact on debt serviceability will be more sector specific, though.
"Self-employed borrowers in affected areas and industries are more sensitive to cashflow pressures caused by loss of income compared with full time, pay-as-you-go employees, who can continue to work remotely with minimal effect on household income.
"This will put some pressure on arrears for self-employed borrowers, and more so in the nonconforming sector, where such borrowers are more highly represented."
Across the broader household sector, the buildup in savings will enable many borrowers to stay on top of mortgage repayments, despite an expected deterioration in economic conditions while lockdowns persist. Borrowers are more likely to pay down debt than spend during lockdowns, which will help to keep arrears low, the report suggested.