That’s because of tightened lending standards in the face of the royal commission, the ratings agency said.
“We expect lending standards for residential mortgages to continue to tighten, in the wake of the royal commission,” it explained in its latest arrears report.
“While this will help to contain the growth in household indebtedness, it could affect credit growth and home prices.
“A slowdown in credit growth is also likely to affect refinancing prospects, which is a common way for borrowers to self-manage their way out of financial stress.”
S&P predicted that borrowers with higher loan-to-value ratios and those with interest-only loans will face “tougher refinancing prospects” thanks to the current lending environment.
Nevertheless, this is unlikely to result in more households going into arrears as most loans are reasonably seasoned and as such have equity built-up.
Home loan arrears rose in March to 1.18 per cent from 1.16 per cent but this figure is still lower than the decade-long average for March (1.31 per cent).
While S&P predicted the level of arrears will remain stable for the rest of the year, it also noted the severity of arrears is increasing. In March this year, arrears more than 90 days late made up about 60 per cent of all arrears, reflecting a 34 per cent increase on the March 2008 figures.
Speaking in April, Reserve Bank of Australia assistant governor (financial markets) Christopher Kent flagged the same issue.
He said borrowers with loans nearing the end of their interest-only periods will face a “significant step-up” in required payments as they shift to principal and interest payments.
These borrowers are particularly at risk should shocks to the Australian economy occur.
“If the borrower has made no provisions and is unable to make the necessary adjustment, they may need to sell the property to repay the loan. Therein lies an additional risk inherent in interest-only lending,” Mr Kent said.
“Moreover, the borrower’s ability to service the loan is not fully tested until the end of the interest-only period.
“The most vulnerable are likely to be owner-occupiers, with high LVRs, who might find it more difficult to refinance or resolve their situation by selling the property.”