The number of consumers who go into arrears in mortgage repayments has likely hit its lowest point, global ratings agency Fitch Ratings says, as strong house prices and low interest rates reduce stress.
But the agency warned that any sudden increase in foreclosures could result in higher losses for mainstream home loan providers, thanks to a sharp increase in the number of uninsured mortgages.
Fitch said today that its Fitch Dinkum residential mortgage backed securities index rose by only 2 basis points to 1.17 per cent in the first quarter of the year.
The index tracks the arrears and performances underlying the mortgage-back securities, a type of investment vehicle made up of a pool of mortgage loans packaged up by banks and financial institutions.
Fitch said the pressures on mortgages in the first quarter of the year, brought on by Christmas and holiday spending, were offset by the Reserve Bank of Australia's interest rate cut in February, which trimmed the official cash rate to, what was then, a record-low 2.25 per cent.
The temporary fall in petrol prices earlier in the year also offset mortgage stress, Fitch said.
"It is evident that arrears performance has reached its lower bound," Fitch said, with arrears remaining stable since the fourth quarter of 2013, when the borrowing environment started improving.
Fitch said, with sturdy issuance volumes, high house prices, stable unemployment and low interest rates, it was unlikely there will be further improvements to arrears.
"Borrowers unable to service loans in the current environment will face limited benefits from any positive movements in these factors," the report said.
Fitch said the index for low-documentation loans worsened by 61 basis points to 5.44 per cent in the first quarter of the year. Low-doc loans are usually given to self-employed borrowers whose incomes are more susceptible to economic downturns.
"Delinquencies" in the low-doc loans tend to be four to fives higher than for loans with full documentation.
Fitch also said the index for non-conforming loans, which are provided to borrowers with adverse credit histories, or who do not meet the lending criteria of mainstream lenders, also worsened in the first quarter.
Arrears of more than 30 days in this mortgage segment rose by 88 basis points to 7.58 per cent, while repayment rates fell to 26.8 per cent from 35.1 per cent in the quarter.
But Fitch said strong house price growth was helping to cure serious arrears, with the arrears for 90 or more days decreasing by 26 basis points over the same period.
Australian house prices, which have risen 7.4 per cent in the 12 months to March, have been a positive for Lender's Mortgage Insurance claims, Fitch said, as strong prices reduce the likelihood of a principle shortfall on defaulted loans.
But Fitch warned that a sudden increase in foreclosures could result in higher losses, as the share of uninsured mortgages in the market increased substantially from 18.1 per cent to 25.2 per cent in the first quarter.