Banks Encouraged to Give Fair Treatment Amid Rate Stress

As pressure builds on $250 billion in loans to heavily indebted homeowners due to four consecutive rate hikes, big banks are anticipated to start examining possible mortgage stress more thoroughly, even by postcode.

The official cash rate had been increased by 50 basis points to 1.85 per cent by the Reserve Bank, marking the fourth consecutive month that it had been raised. This increase results in a monthly payment increase of $140 on a $500,000 mortgage.

As the first institution to act, Macquarie Bank passed on the whole August rate increase to clients. It defied industry trends when it increased its transaction account by the same amount to 2.25 per cent starting August 12.

Borrowers are watching which banks will announce changes and how this will affect deposit and savings rates. For debtors who took advantage of the low mortgage rates at record lows of 0.1 per cent, banks will implement a buffer at 2.5 or 3 per cent to determine if they can pay. This means that many borrowers are approaching rates at which banks reviewed loan serviceability given the 1.75 percentage point increase this year.

As interest rates rise further, banks will begin to analyse individual postcodes, according to Barrenjoey analyst Jon Mott. This is especially true given that 8% to 10% of clients have borrowing amounts that are almost at the maximum permitted. Jon observed that borrowers with high debt-to-income ratios were "heavily weighted" toward the costlier housing markets of Sydney, Melbourne, and Auckland in New Zealand.

Even if arrears wouldn't appear for a few months, S&P Global director Erin Kitson predicted that some geographical areas would be more vulnerable to stress than others. She also noted that some areas have it worse, underlining the possibility that certain borrowers may be burdened by higher rates in locations potentially affected by flooding.

Chris de Bruin, the head of Westpac's consumer and business banking, said the lender was keeping a close eye on the situation but had not yet noticed any significant changes in the number of clients seeking assistance. Chris explained that before they approve a home loan, they implement stress tests to check the borrower’s paying capacity at a higher rate. They continue to keep a close eye on things, especially if the client’s situation changes.

They are encouraging clients to call them immediately if they are in a rough patch. After consecutive interest rates increase, many Australian families are tightening up their budgets. However, most of their borrowers are able to keep up with their monthly repayments, with savings established during the last pandemic.

Martin Currie analyst and fund manager Matthew Davison said that it is still early for borrowers to feel the rate stress yet. Many of them will have saving buffers and will just do necessary optional spending adjustments to keep up. Borrower stress may become more prominent at some time if interest rates and living costs continue to climb, which may indicate that the property market slump will be more widespread.

A rising interest rate environment generally benefits banks since it improves the spread between deposit and loan rates and increases net interest profits. All of the major bank stocks rose on Tuesday. Westpac took the lead, increasing 1.6% to close at $22. The smallest increase came from ANZ, which wants to acquire Suncorp's bank in order to grow its mortgage business. It increased by just 0.3% to $22.81.

While other digital lenders were limiting their operations to metropolitan regions, Daniel Oertli, who oversees Commonwealth Bank's digital product Unloan, claimed that the lender still maintained "quite a generous policy" for where it would refinance mortgages. Unloan serves borrowers who have more than 20% of equity.

Banks are encouraged to give their customers fair treatment. Banks are expected to clamour for clients as property prices go down, the demand for home loans slows down, and $500 billion of low-fixed rate mortgages will be up for renewal.

The most recent rate increase coincided with fresh statistics demonstrating the continued severe decline in home market activity. According to the Australian Bureau of Statistics, the value of new housing loans dropped by 4.4 per cent in June.

The Reserve Bank of Australia should get the inflation down as soon as possible. Around $25 billion of mortgages are facing delinquency risks by 2023 should rates increase to 3 per cent.

S&P's performance index for Australian prime mortgages, which are bundled and marketed as bonds without non-capital market issuance, decreased from 0.73 per cent in March to 0.67 per cent in April.

Visit Makes Cents for the Latest Market News.

Makes Cents aims to equip Australians with information to make sound financial decisions. For more on real estate news, make sure to visit Makes Cents.