Mortgage defaults rise, Analysts warn there’s more to come

Mortgage defaults rise, Analysts warn there’s more to come

Record low property prices and decreasing loan costs haven’t helped a growing number of people who have fallen behind on their mortgage repayments, in a trend that’s only expected to get worse when support from both banks and the government dries up.

The number of Australians more than 30 days late on their mortgage repayments increased by 0.05 to 1.99 per cent in the year to May 2020, the analysts at Moody’s said. Delinquency rates were more commonly up in capital cities than states, including Melbourne, Sydney, Darwin, Brisbane and Perth.

“Mortgage delinquency rates increased in 40 Australian regions over the year to May and fell in 47 regions,” the analysts said.

“Over the next year, mortgage delinquency risks will be high in regions with large economic and labour market dependence on industries such as tourism, hospitality and retail, which have been hit hard by coronavirus disruptions.”

The findings reveal how relief measures may not be enough to help everyone recover from the turmoil induced by the COVID-19 pandemic. The low interest rates and falling property prices have however helped people spend less of their income servicing their mortgage.

The best and worst performing areas

Three states had generally rising delinquency rates over a 12 month period until May 2020.

The percentage of people that were 30 days late or more on their mortgages increased by 0.29 per cent in the Northern Territory, pushing its delinquency rate to 2.71 per cent. This was the largest increase registered across the country.

Victoria’s delinquency rate increased by 0.20 to 1.85 per cent -- its highest level since 2005. Meanwhile, New South Wales’ increase of 0.23 pushed its rate to 1.71 per cent -- a record high not seen since 2013.

Distressed sales are expected to rise next year

The rise in mortgage delinquencies appears to support forecasts that a growing number of houses will go on the market next year because owners can’t afford the repayments.

The problem is expected to hasten then as bank loan deferrals expire and government support payments diminish.

“Coronavirus-related government income support measures and lender loan payment deferrals have curbed mortgage delinquency rates in 2020 However, these relief measures will end in 2021, contributing to mortgage delinquencies,” Moody’s said.

“Household incomes will come under pressure when the government's Jobkeeper and Jobseeker programs end next year. Lower incomes will constrain borrowers' abilities to make mortgage repayments.”

An influx could lead to falling house prices and a delayed recovery

The Reserve Bank of Australia estimates about 15 per cent of homeowners who deferred their mortgage are unlikely to be able to resume their repayments. They warn this could lead to a fraction of them selling their property below their value.

“If many borrowers were to attempt to sell because they are unable to meet their repayments, and demand is weak, housing prices could fall,” the RBA said, in its biannual financial stability report.

“Large and sustained price falls could lead to losses for borrowers and lenders.”

Property values would likely fall in pockets or regions where there’s a concentration of distressed sales, Bill Evans said, chief economist at Westpac.

“If 10 per cent of loans currently in deferral wind up on the market, that would see 60,000 ‘urgent’ sales … – likely enough to shift prices, particularly in areas where there are higher concentrations of these sales and demand is softer.”

The projection of 60,000 urgent sales is a high end estimate, Mr Evans said, and the bank anticipates the number to be lower.

Housing prices have fallen for the last five months, shedding about $12,500 since the beginning of the year.

If a lot of properties were to be listed in an area because the owners couldn’t afford their mortgage repayments, it could lead to property prices there falling and delay the housing market’s recovery.

There’s still options to help people make their repayments

Banks are in the process of contacting half of all of the people who have deferred their mortgage repayments to evaluate their options.

The conversations -- being had with about 450,000 of 900,000 mortgage holders -- effectively offer three options.

1. Restructuring their loan

Converting to an interest only loan for a period of time or increasing the term of the loan could lower mortgage repayments and help people resume payments quicker.

The financial regulators have warned this option should be undertaken when it’s in the financial interest of customers.

2. Extending mortgage holidays

Financial regulators have paved the way for mortgage deferrals to be extended for a further four more months.

Interest continues to be charged on deferred mortgages, and so the reprieve of a mortgage holiday may be offset by the potentially thousands of dollars added to the loan.

There is a hard end date for mortgage deferrals: 31 March, 2021.

3. ‘Tailored options’ -- may include downsizing

Others who can’t afford to pay their mortgage “over the longer term will be offered tailored assistance that addresses their needs,” the Australian Banking Association has said.

Executives at three of the four big banks have said customers may need to downsize their home or investment if they find they are overextended in the current financial climate.

 

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What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

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