According to the latest Standard & Poor's Performance Index (SPIN), Australian prime mortgages in arrears jumped from 1.07 per cent in December 2017 to 1.30 per cent in January 2018.
While January often marks an increase in arrears, courtesy of higher December spending, S&P noted the sheer magnitude of the month-on-month increase.
“While improving employment conditions have helped to keep overall mortgage defaults low, high household indebtedness is making borrowers more sensitive to interest rate movements and changes in their economic circumstances,” S&P said.
“We believe the impact of incremental increases in interest rates during 2017 could be a contributing factor to the rise in mortgage arrears in January.”
Continuing, the ratings agency said only time will tell whether more mortgages shift into higher degrees of arrears due to affordability constraints, or are cured.
Western Australia retained the dubious title of the state with the most mortgages in arrears, while loans in arrears of more than 30 days jumped from 2.08 per cent in December to 2.44 per cent in January, marking a new high.
Those most likely to slip into arrears are households nearing the end of their interest-only period on their loans, given the looser lending standards for interest-only loans prior to 2015. As such, these households could be more vulnerable to repayment pain when they shift into a principle and interest structure.
Joining them, those with high loan-to-value ratios (LVRs) are at increased risk of loss should the borrower default, given the lower level of equity. Additionally, borrowers with high LVRs are more likely to have difficulty in refinancing their loan with another lender.
Like those with high LVRs, loans with high debt relative to income are also at higher risk.
S&P explained that these borrowers have less of a buffer to cover their mortgage if they fell into rate hike-induced financial stress.
“The integrity of debt-serviceability standards is important in ensuring that debt-to-income serviceability assessments reflect each borrower's actual income and expenditure patterns,” S&P said.