Declining rental yields have further increased the likelihood of an increase in Australian mortgage delinquencies over the next two years according to a global credit rating firm.

According to research from Moody’s Investor Services, poor yields, including record lows in Sydney and Melbourne, have made it more difficult for residential investors to service their loans.

“Deteriorating affordability increases the risks for Australian residential property investors and therefore for residential mortgage-backed securities backed by loans on investment properties,” JP Truijens, Moody's assistant vice president, said.

“The deteriorating affordability of servicing investment properties makes residential property investors more vulnerable to risks such as loss of income, interest rate increases, vacancies or rent reductions, and therefore increases their probability of default,” Truijens said.

It’s unlikely that yields will experience an uptick anytime soon; recent research from CoreLogic RP Data revealed that annual rental growth recently slipped into negative territory for the first time on record.

As yields have fallen in recent years, many investors have at least benefitted from strong rates of capital growth, but that too help defaults increase as affordability issues begin to appear.

“The decline in rental yields has increased the level of 'cashflow' losses suffered by residential property investors over the past three years and made investors dependent on greater levels of house price appreciation to cover their losses,” Moody’s Investor Services said.

“Deteriorating affordability also reduces investors' flexibility around refinancing or restructuring their mortgage loan terms, giving them less options should they experience hardship.”

According to Moody’s Investor Services, loans taken out during 2014 and 2015 will be the ones most affected. 

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