Lenders and regulators should “keep their eyes open” to help borrowers avoid financial troubles, a new study by researchers of Reserve Bank of Australia (RBA) suggested.
The report, authored by Matthew Read, Chris Stewart and Gianni La Cava, rather than the official position of the RBA, studied which borrowers and which types of loan ended up falling more than 90 days behind.
They also said the findings reinforce the importance of careful monitoring of changes in lending standards.
The paper concluded that the “higher the loan is as a proportion of the property value when the loan is taken out, the greater the chance the borrower will fall behind.”
“The probability of falling behind is particularly high for loans greater than 90% of the property valuation,” it added.
Other findings are the following:
- The probability of a loan going into arrears is lower for loans that are repaid relatively quickly.
- Low-documentation loans are more likely to go into arrears.
- The higher the starting interest rate, the higher the chance the loans will go into arrears (probably because banks charge higher rates for borrowers they see as riskier, the authors say).
- The probability of missing a mortgage payment is particularly high for households with relatively high repayments compared with their incomes.
- Households that have previously missed a payment are also much more likely to miss more payments.
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