How bank stats hide the real mortgage pain

While this is a positive for banks, which loathe rising numbers of arrears on non-performing loans on their balance sheets, it does disguise the financial difficulty felt by this section of the market.

Based on the accounts of Australia’s largest home lender, the Commonwealth Bank, the mortgage arrears for the quarter to March were 0.44 per cent – up from 0.43 per cent in the December quarter. Westpac calls out its 90-day mortgage delinquencies at 0.68 per cent at March 30 this year.

Faced with the spectre of paying 400 basis points more in interest and the likelihood of rates rising at least one more time this year, struggling households have opted to either trade down to a less expensive house or sell and rent.

And then there are the borrowers who remain outside the non-performing mortgages basket because they have come to a deal with their banks to adjust the terms of their loan to reduce monthly interest payments.

Typically these customers will move onto interest-only payments for a period of time or extend the length of the loan – either would reduce their monthly payments.

Barrenjoey analyst Jon Mott this week outlined a potential scenario where rates rise to 4.6 per cent and remain until next year and unemployment spikes at 5.5 per cent. He suggests that under these conditions many of the high debt to income mortgages written during the pandemic fall into delinquency.

If this is how it plays out, Mott says banks begin to restructure waves of zombie mortgages (those written in 2021-22) by moving stressed customers to interest only or “extend-and-pretend”.

This is not the worst of the three scenarios described by Mott, but he gives it a probability of 25 per cent.

Meanwhile, Owen suggests there could likely be more loss-making home loan sales ahead as the wave of cheap mortgages roll off and the Reserve Bank continues to lift rates.

The reality is that the non-performing loan statistics are backward looking. A borrower who finds themselves in the 90-day arrears basket by the end of March has not been paying interest since December or earlier.

There is an expectation that despite many customers selling their houses to avoid higher interest, the percentage of non-performing loans will continue to rise.

But it will not reflect the number of borrowers who are finding it difficult – or impossible – to service loans at the current interest rate or higher.