Australia’s mortgage arrears to rise as interest rates erode borrowers’ savings

Many lenders have seen a sharp rise in prepayment rates.

Australia’s mortgage arrears are expected to rise amidst rising interest rates and higher cost of living, which are eroding borrowers’ savings, reports S&P Global Ratings.

Prepayment rates–a marker of refinancing activity and borrowers’ ability to pay down loans– are noted to be diverging, the ratings agency noted.

“Many nonbank lenders, for example, have seen a sharp rise in prepayment rates. This comes as fierce competition in lending markets lures many borrowers toward larger lenders with competitive lending rates and cashback offers,” S&P reported.

To date, arrears increases have been delayed by built-up savings and strong employment growth, enhancing job mobility. The coming months is expected to be a litmus test for borrowers facing large increases in their mortgage repayments. 

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“Despite the difficult times ahead for some borrowers, we expect strong employment conditions and proactive efforts by lenders to work with affected borrowers to minimize any dislocation in mortgage markets and systemic risk,” S&P said.

Refinancing was also discussed as an option for borrowers. S&P noted a “strong competition” in refinancing activity in Australia which may reportedly help borrowers avoid getting into arrears.

However, “not all borrowers will be able to benefit from strong refinancing activity, particularly more highly leveraged borrowers with limited savings buffers and less equity built up in their home loans,” S&P warned.