Mortgage arrears is an overdue monthly repayment of a loan. When your loan is overdue for more than 30 days (30+ Delinquency rate) banks are likely to inform the borrower of the legal consequences of missed repayments. Foreclosure is the worst-case scenario in which banks can take possession of the motgaged property.
If there are weak economic conditions and jobs are lost, people who rely on their income to pay their mortgage can go into financial hardship leading to high mortgage arrears, increasing the risk of default. When bad loans are coupled with a bad economy, rampant foreclosures result and the whole economy can be affected. A perfect example is the mortgage default rates in the U.S. in 2009 which sent shockwaves throughout the global economy.
The 30+ delinquency rate is a concerning indicator of the health of the economy as it tells us the percentage of households unable to pay their mortgages.
Australian National Mortgage Arrears
The graph above demonstrates that national mortgage arrears, as calculated by Standard & Poors, have been on the rise for the last three years. Interestingly, during the same period interest rates have been decreasing; in other words, the cost of debt has been getting cheaper. The graph shows a clear relation between these two variables. Low cost of borrowing leads to increasing demand for mortgages. If an investor or owner occupier has borrowed a high portion or all of the purchase, an increase in interest rates will impact their cash flow and ability to hold the asset. This can be a real concern for the economy moving forward as it transitions into a high interest rate environment.
The table below shows the percentage of Australian mortgages per state where borrowers are 30 days behind the monthly repayment (30+delinquency rate).
The worst performing state was Western Australia where the 30+ delinquency rate increased by 44% over the last 3 years.
This increase in arrears is directly related to the economic performance of WA. The WA economy is heavily exposed to the resources sector and, as a result of the slowdown in economic growth over the last 3 years after the end of the mining boom, many borrowers entered into financial hardship as unemployment rose and incomes declined in simple terms.
The ACT had the lowest 30+ delinquency rate (0.91%) of any state or territory in Australia in November 2016. A high proportion of borrowers in the ACT are employed by the government, which offers more secure and stable employment compared with jobs in the private sector.
NSW showed the second lowest 30+ delinquency rate of all eight states. The current state unemployment rate of 5%, being less than the national average, is a good indicator of the health of the economy. This aligns with mortgage arrears which remain at historic low levels.
In markets where property demand is high and prices are rising, borrowers who find themselves under financial stress have the option to sell their property quickly for a good price to repay their loan. Nevertheless, if the disparity between rising prices and income goes beyond fundamental values, housing affordability decreases and risk of delinquencies and defaults rises.
It is important to remember that your monthly repayments and your mortgage are a small piece of the big economic puzzle. Higher levels of debt make households more vulnerable to market shocks. Therefore, planning in advance for interest rates fluctuations and having cash buffers for unforeseen circumstances will keep you out of financial trouble.