Why mortgage defaults will surge by June this year despite interest rates being at a record low

Mortgage defaults are set to surge by the middle of this year despite interest rates being at a record low of just 0.1 per cent.

Credit ratings agency Moody’s Investors Service is predicting an increase in home loan arrears in the first half of 2021 as borrowers struggle to cope with the end of six-month repayment holidays and the phasing out of JobKeeper wage subsidies.

Delinquencies, where borrowers are at least 30 days behind on their repayments, fell at the end of 2020 but this is set to change by the end of June as a result of ‘the uneven economic recovery and the end of government and lender support measures’.

The $1,000 a fortnight JobKeeper payments for full-time workers are ending on March 28.

Just three days later, the $150 coronavirus supplement is ending for JobSeeker unemployment benefits.  

‘In this environment, mortgage delinquencies will increase over the first half of 2021, particularly when borrowers have to resume repayments after loan deferral periods end,’ Moody’s said.

The rise in mortgage delinquencies – for borrowers 30, 60 and 90 days behind on their repayments – would also coincide with an increase in house prices, with CoreLogic data showing records in February were set in 53 of Australia’s 88 sub markets.

‘Rising house prices will curb mortgage delinquencies risks to some extent, because they will make it easier for borrowers in financial difficulty to sell their properties and repay loans,’ Moody’s said.

‘But the positive influence of rising house prices will not be enough to prevent delinquency rates from increasing in the first half of 2021.’

Credit ratings agency Moody’s Investors Service is predicting an increase in home loan arrears in the first half of 2021 as borrowers struggle to cope with the end of six-month repayment holidays and the phasing out of JobKeeper wage subsidies. Pictured is Brisbane cafe

Moody’s expected the rate of mortgage defaults and delinquencies to fall again in the second half of 2021 as the economy recovered.

‘Towards the end of 2021, as the economic recovery gathers momentum, we expect the situation to turn around and for delinquency rates to improve,’ it said. 

The Commonwealth Bank, Australia’s biggest home lender, revealed on Tuesday a record level of home buying intentions.

Mortgage applications and Google searches in February were at the highest level since the monthly Household Spending Intention data series began in 2015.

In December, 1.44 per cent of loans with a major bank were 30 days or more behind with repayments, compared with 1.69 per cent in June 2020, as Australia slipped into recession for the first time in 29 years, Moody’s data on mortgage securities showed.

The Reserve Bank of Australia in November last year cut interest rates to a record low of 0.1 per cent and governor Philip Lowe has vowed they will stay there until at least 2024.