OPINION: Veteran bank analyst Jon Mott says even borrowers with full-time jobs might not be able to escape mortgage delinquencies as rates rise sharply.
The inflation/rates story is well known; Tuesday’s 0.5 percentage point rise took rates to 1.85 per cent, from just 0.35 per cent in May, and ANZ forecasts rates hitting 3.35 per cent by the end of the year.But Mott also provides some fascinating historical context on how debt has built up, by looking at the past 10 housing cycles to study the potential impact of rising rates on credit growth.
“It is akin to the old saying that, ‘if you have your head in the oven and feet in the freezer, you feel OK, on average’. In banking, it is the tail that matters, the last 5 per cent to 10 per cent of borrowers.”Borrowers at maximum While he concedes the analysis is rough, he estimates that, in total, borrowers who have somewhere between $200 billion and $250 billion in mortgages will face severe stress if the cash rate hits 3 per cent later this year, as expected.“If interest rates continue to rise sharply, and stay around these levels, there will be a ‘fat tail’ of borrowers who will simply not be able to afford to meet their repayments,” Mott says.
This period of mortgage stress would be compounded by the fact that $800 billion of fixed-rate mortgages taken out in the past two years at rock-bottom rates will start to expire over the next 18 months, with borrowers facing steep rises in borrowing costs; on a $1 million mortgage, annual interest payments of $19,000 may shoot above $50,000.Collective provisions stand at a historically low $17.
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