Home truths for banks
Moody’s warns of mortgage default pressure
RISING interest rates are expected to push more Australians to default on their mortgages in the coming year as increasing debt levels outstrip sluggish wage growth, a leading ratings agency says.
In a new report, Moody’s Investors Service has warned the deteriorating conditions in the housing market are also likely to put further pressure on the major banks.
The Commonwealth Bank and Westpac are most exposed to rising risks in the $1.7 trillion mortgage system because of their high exposure to interestonly loans, the report says.
Such loans require no payment of a mortgage’s principal amount until the end of an interest-only period that usually runs five years.
Home loan borrowers who have interest-only loans and move to mortgages that require principal-and-interest repayments are twice as likely to default on their mortgages, the ratings agency says.
While many borrowers were previously able to refinance interest-only loans at the end of the interest-only period, the prudential regulator’s push for banks to restrict this type of lending to just 30 per cent of all new business is restricting borrowers from refinancing.
Tougher standards on borrower income and expenses are also leaving interest-only customers unable to refinance.
The warning follows revelations on Tuesday that the Reserve Bank has become less confident in the control regulators State Gas executive director Greg Baynton says a Bowen Basin site may have significant gas supplies have over the housing market downturn, cautioning that the banking sector’s “reduced appetite to lend” is having an impact on credit growth.
Moody’s yesterday said although strong employment conditions were expected to keep a lid on a large blowout in loan defaults, the financial sector was vulnerable to rising rates and the rising tide of interest-only loans converting to mortgages requiring principal repayments.
Many borrowers entered into interest-only mortgages not long before APRA began to force banks to lift lending standards.
The bulk of these loans are expected to mature in 2020, which worries analysts because of the likely inability of many of the borrowers to repay the loans if they cannot refinance on an interest-only basis.