More homeowners tipped to struggle with mortgage payments as rates rise in 2010

Australia’s exceptionally low rate of mortgage arrears (missed payments) could rise in 2010 as unemployment grows and interest rates keep climbing, a new report from ratings agency Fitch claims.

The warning comes as new research show falling rates of housing affordability is also likely to have an impact on the ability of mortgage-holders to repay their loans.

The Fitch report finds 30+ delinquency rates, which record the amount of mortgages which have missed at least one payment, increased by 2.13% during September 2008 to reach a high of 2.39% in January 2009, but have since declined to 1.61% as of 30 September.

Additionally, 90+ day arrears increased from 0.97% in September to 1.11% in January, but have since declined to 0.8%.

These rates are relatively low compared to the rest of the world, with 90+ day arrears rates in Britain remaining at 2% in September, while in the US, where the sub-prime mortgage crisis began, 60+ day arrears stood at 7.8%.

Natasha Vojvodic, author of the report, says one of the major trends was the surprising resilience of the Australian property market.

“The major findings were that arrears have improved, as we’ve been in a very benign environment all year long with low interest rates, and a relatively resilient economy. Unemployment did not reach expected levels, and we also found that the 10 worst performing suburbs previously had improved due to the increase in housing affordability.”

Arrears declined in states, but NSW and WA are still the worst-performing areas with rates of 1.9% – 0.3% above the national average. SA is the best performing state, with a 30+ day arrears rate of just 1.2%.

Sydney has taken the title of worst performing area in Australia for mortgage performance, with five of the 10 worst performing regions in the Sydney area.

By dollar value, the worst performing postcode was Nelson Bay on the north coast of NSW, with a 30+ day arrears rate of 9.3%.

But while arrears rates have improved over the last year due to low interest rates, Vojvodic says the key factors over the next year which will have an impact on mortgage performance will be unemployment and housing affordability.

The comment comes as the latest figures from the Real Estate Institute of Australia deposit power housing affordability report shows the proportion of family income required to make home repayments has increased over the September quarter.

The report shows the income required to meet home repayments has increased to just over 29%, up from the 28.9% recorded during the June quarter. REIA president David Airey said in a statement the increase was a small, but difficult weight to bear for families.

“Although only marginal, the second decline in housing affordability in as many quarters is not positive news for those trying to pay off a mortgage or looking to purchase a home.”

“Rapid interest rate increases have the potential to dampen the market and stifle recovery. Housing affordability could decrease even further in the next quarter, which is a major disappointment for Australians.”

Vojvodic agrees, saying the outlook for the next year is not necessarily as strong as the last, with the Reserve Bank of Australia indicating it will move the official cash rate away from expansionary territory.

“The outlook for the next year, as rates go up, is that arrears will increase and those suburbs where there are more highly geared borrowers will perform worse.”

Vojvodic is referring to the loan-to-value ratio of certain suburbs, saying this figure is more important to identify in poorer-performing suburbs. The report claims borrowers with LVRs above 80% have higher 30+ and 90+ day arrears than those with lower LVRs.

“The higher the borrower’s LVR, the higher the percentage of income required to make mortgage payments; as such, any changes to interest rates will have a larger impact on the percentage of income paid as interest payments,” the report states.

The postcode with the highest weighted average current LVR is St Marys in western Sydney, with an LVR of 67.5%. Additionally, five out of the top 10 postcodes with the highest average LVRs in the country are also in south-west or western Sydney, with Vojvodic saying these areas are likely to underperform compared to the rest of the market as interest rates continue to rise.

“The outlook for the next year really depends on what’s happening with interest rate and unemployment. They are the two main factors which will steer where the market goes.”

The top 10 worst performing postcodes by value, (30+ day arrears rate):
1. Nelson Bay, NSW – 9.3%
2. Casuarina, WA – 5.1%
3. Budgewoi, NSW – 4.9%
4. Toronto, NSW – 4.7%
5. Sylvania Waters, NSW – 4.6%
6. Manduah, WA – 4.5%
7. Forster, NSW – 4.3%
8. Palm Cove, QLD – 4.2%
9. Richmond, NSW – 4%
10. Port Melbourne, VIC – 4%

The top 10 worst performing postcodes by number, (30+ day arrears rate):
1. Nelson Bay, NSW – 4.4%
2. Wetherill Park, NSW – 2.9%
3. Richmond, NSW – 2.9%
4. Casuarina, WA – 2.8%
5. Mandurah, WA – 2.7%
6. Budgewoi, NSW – 2.6%
7. Hampton Park, VIC – 2.6%
8. Mount Druitt, NSW – 2.4%
9. St Marys, NSW – 2.3%
10. Huntingdale, WA – 2.3%