Mortgage arrears near record lows as banks tighten lending

Australian mortgage arrears were at their lowest fourth quarter level in more than a decade, as low rates and rising prices insulated borrowers.

Credit rating agency Fitch's "Dinkum" residential mortgage-backed securities (RMBS) index tracks the performance of a large number of loans that have been bundled up and sold by lenders to other investors.

It found the level of 30-plus-day arrears overall was just 0.95 per cent over the three months to December 2015, the lowest fourth quarter level in 11 years.

Arrears were down 0.2 of a percentage point compared to the same period in 2014.

"The level of arrears in the fourth quarter of 2015 reflected strong house price growth, low unemployment, low standard variable rates and low inflation," the report noted.

The actual loss rate on loans remained even lower, at 0.02 per cent, as rising property prices in most of the big cities meant lenders could recoup the value of their loans in case of default by the borrower.

While Fitch expects this loan loss rate to remain low, it is also forecasting a small uptick as property price growth moderates over 2016 from the double-digit national average levels witnessed at times last year.

Regulator moves result in 'tougher line' for borrowers

The ratings agency said last year's moves by the bank regulator, APRA, to tighten financial institutions' measures of borrowers' ability to repay their loans are likely to keep a lid on loan losses.

"The introduction of measures, such as interest-rate floors, means borrowers should have more buffers to withstand increases in interest rates and unemployment, and a slowdown in the housing market," the report observed.

"The changes to underwriting standards are positive for holders of newer vintage RMBS transactions, especially in the current low-interest-rate and high house price environment that has fuelled household borrowing."

Financial comparison website finder.com.au said that Australia has seen the most dramatic three-month fall in average loan sizes since 2000.

With regulators cracking down on how much banks can lend to home buyers relative to their incomes, the average amount borrowed fell more than 4 per cent in February to $357,200 and is down 7.7 per cent over the past three months.

The analysis of ABS data reveals that New South Wales had the biggest drop of 10.15 per cent over the past quarter.

"Banks are scrutinising new loan applications more closely, taking a tougher line when assessing borrowers income," said finder.com.au money expert Bessie Hassan.

While the overall news was positive, Fitch also noted a steep rise in 30-plus-day arrears for self-employed borrowers with low-doc loans.

The arrears for this group were 7.29 per cent, a 32-basis-point increase.

Source: ABC News

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