Many Australian borrowers are early on their mortgage payments, and this should protect them from a hard landing as interest rates rise, according to Shayne Elliott, chief executive of major Australian bank ANZ.
The Reserve Bank of Australia has raised the official cash rate six times in a row this year to 2.6%, forcing mortgage rates up from lows of around 2% to around 5-6%. Australia’s housing sector is set to bear the brunt of higher interest rates as the central bank battles inflation.
Elliot told CNBC’s “Squawk Box Asia” on Thursday that many borrowers could weather these changes, citing that about 70% of ANZ clients with variable rates had accelerated payments. That would reduce cash flow pressures on borrowers as rates rise.
“As interest rates have fallen in the last 10 to 20 years, what people have done is use their savings to advance their payments,” Elliot said.
“As of today, 70% of our clients are in advance on their mortgage loan payments and of that 70%, half of them are more than two years in advance.”
“As interest rates go up for a lot of those customers, nothing changes. Why? They’re reducing the amount of time they have up front on their payments. Customers are in pretty good shape.”
But for those with fixed-rate mortgages, they could face some stress when their mortgage payments rise in the years to come after their fixed terms end. Even then, most people should be able to cope given that banks in Australia had been dampening mortgage applications by 3%, Elliot added.
In 2019, the Australian financial regulator, the Australian Prudential Regulation Authority, told banks to apply a loan “serviceability buffer” of at least 2.5 percentage points before it rose to 3 percentage points in 2021.
It has implemented a 2% buffer since 2014 as part of its efforts to manage risks, such as containing a runaway housing market benefiting from then-historically low interest rates as well as high levels of household debt. Mortgage loans made up a large part of the banks’ loans.
However, mortgage rate increases for many borrowers were approaching the applied buffer, the RBA said during its monetary policy meeting earlier this month.
The central bank noted that high savings levels during the pandemic and a strong labor market with high incomes mitigated concerns about debt service.
“This, together with leniency for some borrowers, resulted in low levels of loan delinquencies,” the RBA said in its statement.
Elliot agreed, saying ANZ clients are heading into an uncertain time in “a very, very strong way.”
Many Australian borrowers are ahead on their mortgage payments, and this should protect them from a hard landing as interest rates rise.
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He said customers are not only building their savings and paying off their home loans, but also other loans, such as credit cards. Many clients’ salaries have also kept up with inflation, she added.
“We’re very confident in our home loan book. The bite is going to be delayed because of all those factors I talked about,” he said.
“As of today, people who are under stress with home loans that are 90 days past due are starting to drop. So we haven’t seen an uptick in distress yet.”
Moody’s said in a report this week that while delinquencies for the 12 months ending in May were down in most states in Australia, it predicts “default rates will rise over the next year due to rising interest rates.” interest, cost of living stresses and falling property prices.”
“Falling home prices will increase the risk of mortgage loan delinquencies and defaults, because a weakened housing market will make it more difficult for financially distressed borrowers to sell their properties at prices high enough to afford their debt,” Moody’s said.
According to Moody’s, during the September quarter, house prices fell 6.1% in Sydney, 3.7% in Melbourne and 4.1% on average across Australia.