Aussie borrowers vulnerable to defaults: Fitch
Interest rate hikes are increasingly likely to send Australian homeowners into default, Fitch Ratings has claimed.
In an exposure draft review of the Australian RMBS sector, the ratings agency has claimed homeowners are now more vulnerable to interest rate hikes than during the recession of the 1990s, when interest rates were around 17%. Director of Fitch's Australian structured finance team David Carroll said this could be attributed to rising levels of indebtedness and higher house prices. He commented that this could change the criteria by with Fitch rates Australian RMBS.
"The current criteria are based on mortgage loan performance data from previous Australian recessions. The past decade has seen a significant change in the mortgage market, household leverage and a considerable increase in property prices. Those factors combined with the increased borrower sensitivity to interest rate rises may result in mortgage performance in any future downturn being significantly worse than the last recession," Carroll said.
Household debt as a percentage of income has risen from 49.4% in December of 1991 during the previous recession to 156.4% in December of 2010. In the same time period, interest payments as a percentage of disposable income have risen from 9% to 11.9%, though current interest rates are less than half what they were in 1991. According to the Fitch exposure draft, this puts borrowers in a vulnerable position.
"These figures show a substantial shift in the indebtedness of Australian borrowers, who are now significantly more sensitive to moves in interest rates than they were 20 years ago. For this reason, Fitch believes any downturn could be significantly worse than the recession of 1991, on which the current mortgage default criteria is based," the report said.