The number of Australians falling behind on their mortgages will rise in the next two years as interest-only loans end and repayments get more expensive, ratings agency Moody’s has warned, via MSN.
Delinquencies on loans that have converted from interest-only to principal and interest are running at double the rate of those still on interest-only, Moody’s said in a report released on Thursday.
“When IO (interest-only) loans convert to P&I (principal and interest), borrowers have to make higher monthly repayments, and this ‘payment shock’ can lead to mortgage delinquencies and makes IO loans riskier than P&I loans,” Moody’s said.
Repayments jump by around 30 percent when mortgages convert to principal and interest, the agency said.
Currently, the delinquency rate for mortgages converted to principal and interest is 0.94 per cent – a rate also above the arrears rate for all mortgages.
“Refinancing interest-only mortgages is also becoming more difficult, which will in itself contribute to an increase in mortgage delinquencies,” the ratings agency said.
About 40 per cent of loans by Australian banks in 2014 and 2015 were interest-only for five years, meaning a large portion are set to come under pressure with higher repayments in 2019 and 2020, said Moody’s.
Moody’s report backs up findings from Digital Finance Analytics (DFA), which estimates that more than 970,000 Australian households are now believed to be suffering housing stress.
That equates to 30.3 percent of homeowners currently paying off a mortgage.
Of the 970,000 households, DFA estimates more than 57,100 families risk 30-day default on their loans in the next 12 months.
“We continue to see households having to cope with rising living costs – notably childcare, school fees and fuel – whilst real incomes continue to fall and underemployment remains high,” wrote DFA principal Martin North.
“Households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, and now prices are slipping.
“While mortgage interest rates remain quite low for owner-occupied borrowers, those with interest-only loans or investment loans have seen significant rises.”
