Fitch: Australian mortgage arrears stable in 2Q15; conditions are as good as it gets

Fitch Ratings says that Australian mortgage arrears have improved by 5bp to 1.12% during 2Q15, as expected. These figures have remained between 1.0% and 1.2% since 4Q13. Fitch believes there is little capacity for significant improvement in delinquencies, given current the low interest rates, strong housing market, and stable unemployment rate.

The annualised loss rate continued to improve marginally yoy, as the national house-price gain of 9.8% yoy helped to clear long-dated arrears, and limit losses and claims to lenders' mortgage insurance providers.

Self-employed borrowers continue to experience financial difficulties despite the benign economic environment as indicated by the Low-doc Dinkum index which recorded a 28bp increase in 30+ days arrears to 5.72% in 2Q15. Non-conforming borrowers continue to exhibit higher levels of arrears than prime borrowers with the non-conforming index recording a 30+days delinquency rate of 7.96% as of June 2015.

We believe arrears may increase if unemployment rises in line with expectations at end-2015. Household expenses are expected to have a crucial role in borrowers' serviceability although CPI rose by just 1.5% yoy in June 2015. Fitch believes that if the cost of living increases and outpaces income growth, mortgage performance will be negatively affected.

Fitch's Dinkum RMBS Index tracks the arrears and performance of the mortgages underlying Australian residential mortgage-backed securities (RMBS).