According to Shayne Elliott, chief executive officer of ANZ, a large Australian bank, many Australian borrowers are ahead on their mortgage repayments, which should protect them from a rough landing when interest rates climb.
This year, the Reserve Bank of Australia has raised the official cash rate six times in a row, bringing it to 2.6%. As a result, mortgage rates have increased from approximately 2% to between 5% and 6%. As the central bank combats inflation, the property market in Australia will likely face the weight of rising interest rates.
Thursday on CNBC’s “Squawk Box Asia,” Elliot stated that many borrowers would weather these adjustments, noting that over 70% of ANZ’s clients with variable interest rates have expedited their repayments. This would reduce the cash flow challenges of borrowers when interest rates climb.
“As interest rates declined over the past ten to twenty years, individuals utilized their savings for pulling ahead on their loan repayments,” Elliot explained.
“As of now, 70% of our clients are current on their mortgage payments, with 50% of those customers being more than two years ahead.”
For many of these clients, nothing changes when interest rates climb. Why? They are decreasing the amount of time they are in advance on their repayments. Customers are doing rather well.”
Those with fixed-rate mortgages, however, may experience financial strain in the years after the expiration of their fixed-rate agreements when their mortgage payments increase. Even yet, most individuals should be able to manage since Australian banks have been buffering mortgage applications by 3%, Elliot said.
In 2019, the Australian financial regulator, the Australian Prudential Regulation Authority, instructed banks to impose a “serviceability buffer” loan of at least 2.5 percentage points. In 2021, this buffer will increase to 3 percentage points.
It has introduced a 2% buffer since 2014 as part of its measures to control risks, such as curbing a runaway property market fueled by low-interest record rates and high household debt levels. The majority of banks’ lending consisted of home loans.
During a monetary policy meeting earlier this month, the RBA stated that mortgage rate hikes for many borrowers were inching closer to the cushion applied.
The central bank highlighted that high levels of savings throughout the epidemic and a robust job market with high salaries eased worries over the nation’s capacity to fulfill its debts.
“This, along with forbearance for certain borrowers, led to low levels of loan arrears,” the RBA stated in a statement.
Elliot concurred, stating that ANZ’s clients are in “sturdy form” as they enter an uncertain period.
According to him, customers are growing their savings, paying down their mortgages, and paying off other liabilities, such as credit card loans. He stated that many clients’ wages had also kept pace with inflation.
“We have great confidence in our portfolio of house loans. “The bite will be delayed because of all the variables I’ve mentioned,” he added.
“As of today, the number of individuals under stress owing to 90-day-past-due mortgages has begun to decline. So far, we have not observed a rise in peril.”
In a study released this week, Moody’s stated that while delinquencies in the 12 months ending in May decreased in the majority of Australian states, “delinquency rates will climb over the next year owing to interest rate rises, cost-of-living stresses, and declining property values.”
“Falling house values will raise the likelihood of home loan delinquencies and defaults because a deteriorating property market will make it more difficult for borrowers in financial distress to sell their houses at high enough prices to repay their debt,” according to Moody’s.
According to Moody’s, home prices fell 6.1% in Sydney during the September quarter, 3.7% in Melbourne, and 4.1% on average across Australia.
