“This whiplash in household expenses will cause a significant amount of financial pain and stress for Australian mortgage holders,” Mr Watkins said, who is most concerned about first home buyers who took out loans when they only had to prove they could service them at 5 or 6 per cent.
“With the way the rates have moved, they will now have to demonstrate servicing at 9 per cent if they want to switch lenders to get a better rate,” he said, referring to APRA’s 3 per cent mortgage “buffer” which banks need to add to market rates when assessing new customer loans.
“Our data suggests a large number of first home buyers won’t be able to demonstrate this and will get trapped with their existing lenders,” he said.
Big banks winning market share
The major banks have so far been the winner through the first half of the transition wave and the RBA predicts a million more borrowers will switch to variable rates this year.
Data from PEXA, a digital property settlements firm, shows the major banks wrote more than 65 per cent of new loans and picked up almost the same amount of refinancing work in the past financial year, both up 2 per cent year-on-year.
For smaller lenders, however, the share of both markets declined.
Suncorp, at its results last Wednesday, said only 20 per cent of its home loan portfolio is still on fixed rates and 0.42 per cent of its mortgage customers are more than 90 days late.
Bendigo & Adelaide Bank will report its results on Monday. UBS analysts expect the bank will report a drop in lending activity but still return a record cash profit of $627 million. National Australia Bank and ANZ will also provide quarterly updates this week when further commentary about the quality of housing lending is expected.
RBA governor Philip Lowe, in his last appearance before a parliamentary economics committee before his retirement next month, said on Friday that the central bank was watching the mortgage resets carefully as borrowers come to terms with rates “3 or 4 percentage points” higher than previously.
Dr Lowe said “the peak rate of rollovers has just happened”, adding the numbers will “stay high through this year and gradually reduce next year”.
The RBA predicts $350 billion of fixed-rate mortgages will expire this year.
Dr Lowe said households are coping with the transition to higher variable rates well so far and many have lifted savings ahead of the changes, but he warned this did not mean future problems could be ruled out.
“What we know from the banks about the million that have transitioned is that when they transition, they haven’t fallen behind on their housing loans at any greater rate than those on variable-rate loans,” Dr Lowe said.
This was because the tightening cycle was “the most telegraphed increase in mortgage rates ever”, despite his call in 2021 that interest rates would be on hold until 2024. “People have prepared for [the increasing repayments] … they have been squirrelling away more,” he said.
“The vast bulk of Australians are sensible, they knew this was coming … it has gone smoothly, but that doesn’t mean there won’t be problems down the track.”
Jon Mott, an analyst at Barrenjoey Capital Partners, said that while loan repayments that were more than 90 days late had not noticeably increased, those 30 days overdue had “started to turn”, although they were “very low compared to historical averages”.
Mr Mott, who was broadly negative on the CBA result because of its falling net-interest margins, said “new impaired assets, which typically lead a credit cycle have risen off their lows”. But he did not think impairment charges would rise substantially at the bank over the next three years.
Mike Vacy-Lyle, CBA’s head of business banking, said there was growing evidence that consumers are cutting spending to cope with higher repayments, creating trading challenges for small businesses, especially in discretionary retail.
“Without a doubt we are seeing an increase in stress, especially in smaller businesses,” Mr Vacy-Lyle said, adding that calls to the assistance centre remained low, but “we have seen an increase over the last quarter”.
“The sectors we are the most concerned about are discretionary retail, especially apparel and footwear – we have seen a slowdown there. Also, cosmetics, we have seen some stress in that space.”
