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Mortgage delinquency rates to improve by end of 2021

Delinquency rates are expected to improve as economic momentum builds, but not before taking a hit on the first half of the year.

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Delinquency rates for Australian residential mortgage-backed securities (RMBS) declined over the second half of 2020 due to government support measures and lender loan payment deferrals.

“In December 2020, the 30+ days delinquency rates for prime, non-conforming and near prime Australian RMBS declined compared with that in June 2020, according to Moody's vice-president and senior credit officer Alena Chen in Moody's Investor Service’s new report.

“Coronavirus-related government support measures for individuals and small businesses and lender loan payment deferrals supported borrowers over the second half of 2020.”

However, as the end of these support measures draws nearer, Ms Chen said that arrear rates could rise in the first half of 2021 before ultimately improving towards the end of the year as economic momentum builds.

While Moody's forecasted a 3.8 per cent growth for Australia’s GDP in 2021, economic recovery is expected to remain uneven, with some sectors to improve and some to continue struggling, according to the credit officer.

“Most lender loan payment deferral periods and some government support measures, including the Jobkeeper scheme and the coronavirus supplement for income support recipients, end in March,” Ms Chen noted.

“In this environment, mortgage delinquencies will increase over the first half of 2021, particularly when borrowers have to resume repayments after loan deferral periods end.”

As of December, the share of mortgages on coronavirus-related payment deferrals averaged around 3 per cent for prime RMBS portfolios and 4.5 per cent for non-conforming and near-prime RMBS.

Looking ahead, the improvement in housing markets could help curb mortgage arrears as house prices rise and ultimately make it easier for borrowers in financial difficulty to sell their properties and repay loans.

“Towards the end of 2021, as the economic recovery gathers momentum, we expect the situation to turn around and for delinquency rates to improve,” Ms Chen concluded.

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