Banks fear a drop in profits as mortgage defaults rise

Concerns have been raised in the property industry over an increase in mortgage delinquencies, with more Queenslanders struggling to meet their repayments than in any other state.

For lenders, this means a potential decline in profits as they are forced to cover mortgage arrears and in some cases, foreclose on home owners and risk facing losses with house prices flatlining or falling marginally.

According to data from ratings agency Fitch as published in a recent article in The Australian, mortgage defaults in Queensland have jumped sharply from 1.54 per cent in the December quarter to 2 per cent for the March quarter.

This is quite a significant difference to the national figure of 1.23 per cent of mortgage holders who have missed at least one repayment; however arrears are up across all states and in the mortgage belt suburbs of Western Sydney many homeowners seem to be doing it tough.

Victorians are managing to meet their mortgage commitments better than others, while Western Australia has seen a moderate increase in late repayments over the past six months.

Fitch associate director James Zanesi said one in 400 mortgages across Australia are considered to be in arrears, largely due to rising interest rates and the cost of living, and predicts that this number will grow.

“The higher interest rate is the logical explanation for the increase,” Mr Zanesi said.

“If householders are paying more on their mortgages, then there’s more chance that there will be (mortgage) service issues.”

While the ratings agency doesn’t expect this latest increase in the amount of struggling homeowners will impact on the property market, they do feel that another rate rise before the end of the year will see a rise in the number of mortgage holders experience servicing difficulties.

“We don’t expect a deterioration in the Australian market like we have seen in the overseas markets,” Mr Zanesi said.

“But we think that it is logical that if we get another interest rate shock in the next three to six months that it will take borrowers some time to adjust to that, and we could see arrears move higher.”

“The longer-term concerns regarding affordability will now depend on future monetary policy decisions, as well as the increased cost of living.”

Australia’s two largest banks are expected to experience the biggest rise in mortgage arrears because they were the most active residential lenders during the downturn.

While it might be hard for many home owners to have much sympathy for the banks and their shareholders when it comes to a slight dent in their profit margins, we should keep in mind that lenders will rarely cop such a loss lying down.

If arrears do continue to rise sharply in the coming months, it will be interesting to see how the banks respond and whether they decide to alter their currently competitive loan products offerings.

By the way…this slight increase in mortgage delinquency is not enough to destabilise our property markets.