The next few months are going to be a struggle for Australian borrowers, especially those with interest-only loans, as mortgage delinquencies are likely to increase, according to an analysis by Moody's Investors Service.
Interest-only borrowers who took out mortgage deals in 2014 will soon start paying on a principal-and-interest basis. This will likely result in more Australians falling behind on their payments as average mortgage repayment levels jump by 37%. Around 900,000 borrowers will have their interest-only periods expire this year. Collectively, their loans amount to $295bn.
"Over the coming quarters, we expect Australia's record-high household debt, which amounts to almost 200% of annual gross disposable income, will contribute to a moderate increase in delinquencies," Moody's said.
In fact, the 30-day delinquency rate for Australian residential mortgage-backed securities increased from 1.54% during the December quarter last year to 1.58% in the March quarter this year.
"Delinquencies will continue to increase over coming quarters, because of high debt levels, the conversion of a large number of interest-only mortgages to principal and interest loans and declining house prices," Moody's said.
The number of retiring Australians still carrying mortgage debt has increased, data from the Australian Bureau of Statistics show.
The share of homeowners in the 55-64 age bracket who are still carrying debt has tripled from 14% to 47% in the last 25 years. The debt-to-income ratio in this age group has ballooned from 72% to 132%.
Read more: Retirees will soon struggle to own a home
Three factors have influenced this growing trend amongst retirees, industry watchers Rachel Ong ViforJ and Gavin Wood said in a think piece in The Conversation.
One of the most significant factors was how property prices grew at a much faster pace than incomes did. The national dwelling price-to-income ratio has already doubled since the 1970s.
"Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, potentially shortening the remaining working life available to repay the loan," the two said.
The frequent use of flexible home loans which allow access to housing equity was another reason for the increase in debt-ridden retirees.
"During the first decade of this century, one in five homeowners aged 45-64 years increased their mortgage debt even though they did not move house," ViforJ and Wood said.
Older homeowners also tend to have the mindset they would work longer in their lifetime, allowing them to take on a bigger mortgage.
"For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts prolong working lives. In 2017 around 29% of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from 25% four years earlier," the two said.
This have resulted in many Australians risking their homeownership. Figures from AHURI showed that around half a million Australians in their 50s had lost their home during the first decade of the 21st century.
"Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the age pension," the two said. "Mortgage debt burdens late in working life will also expose homeowners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages."
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