One in five interest-only borrowers could default on mortgage repayments: UBS

One in five interest-only borrowers could default on mortgage repayments: UBS

One in five interest-only loan borrowers could default on mortgage repayments when their interest-only loan expires, the latest UBS housing and banking survey reveals.

The Reserve Bank previously indicated almost half a trillion dollars in interest-only mortgages - or about 30 per cent of all outstanding mortgages - will convert to principal and interest loans over the next four years, jacking up monthly repayments for almost 1.5 million borrowers and cooling housing markets further.

"This last finding is quite concerning, in our view, as it implies that 18 per cent of Interest-only customers will not be able to afford to pay their monthly mortgage repayment when their Interest-only period expires," the 2018 UBS Evidence Lab Mortgage Survey said.

 

And its looking highly likely that rates will be going up again in the US next week as the US 10 year treasury note surges past 3% with another one possible in December.
Maybe more interest rate movement's in Australia in the new year.

 

always interesting to hear these type of predication, along with the recent 60 minutes progress, they definitely get the attention they planned.

let's see what happens in 15 months time, that is when majority ( according reports) of the IO loan come off IO term.

 

At least international funding rates will keep going up. Maybe one more round of out of cycle hikes?

 

Any updates on default rates? I found this graph on the securitisation com au market snapshot page, it doesn't look too scary when compared to the 'ol gfc 12 yrs ago. Am I missing something? There seems to be a LOT of fear around about defaults currently but I am not sure how warranted that sentiment is historically speaking.

 

it's growing but very slowly

the latest data were from ANZ:

 

Interestingly supply of existing housing figures is dropping of very quickly over the past 12-18 months. This supply response is quite common during a downturn. The fear was (at least from the article) that the supply of existing dwellings would increase as a result of IO2P&I transition. This hasn't happened (thankfully, definitely don't want people losing their homes).

1/5 won't default. A 20% default rate suggestion is a bit nuts (armageddon). In Syd & Melb (the strong economy performers) so far, 1/150 are not defaulting yet. I.e. less than 0.75% of mortgages are in arrears, and fewer still defaulting.

Defaults are tied to economic conditions more than anything else (repayment changes, etc). While people are in jobs, mortgages get paid. Explains why borrowers on far larger mortgages & DTI ratios (Syd/Melb vs other states) have far lower default rates across the country.

 

May be, just may be, IO investors (being more savvy) would rather sell in anticipation of not being able to afford IO2PI switch, then default and stuff up their credit?
this scenario won't be captured in simple default figures, rather it will continue the downward pressure on prices.

I wonder if there is any analysis on why prices have fallen so much and so fast in frothy segments, who are the sellers why are they selling or sold (it can't all be divorces or deceased)

 

I'd go so far to say that 100% of people who have borrowed money for any purpose are at risk of default.

Most of them won't default, but there's always a risk that they might.

 

Survey some ordinary people whether they can save 10% of their income.

Most will probably say no.

Now say their pay gets cut by 10%. Can they survive? Probably more than the number who said no.

 

Sellers holding on and not meeting buyers expectation should result in price stabilisation then?

here's total listing so far,
there is still a lot of sellers in the market, The chart won't tell you at what price though.
but as per core logic daily index Sydney house price so far has fallen close to 16.5% (uptill mid may),
data lag?

 

Great point @Trainee

I can tell you from personal experience that it's possible to live on an expense figure below the HEM benchmarks. When things get tough, people pull back. You'll never convince the banks of this though.

 

that would be my guess. I sold one in the rising rates of 2007 because we had our 3rd child, wife not keen to rush back to work and cashflow looked a bit iffy, I had zero intention of defaulting so the sale was a fairly easy choice. Even a modest capital gain of around $50k bought us several years of low stress finances.

 

UBS are always permabears.... They've been releasing negative stats on Australian housing for years.

They might well be right but their credibility is wearing a little thin.

 

I agree on default scenario.....

Having just gone through process of refinancing with one of the major banks, i can tell you it is SO BLOODY PAINFUL...i have a very high income and heck! if i find it painful, i wonder how the average man/woman in the street can get finance

 

I was just reading your other post. It is a painful process, that's what we go through with every application.

The truth is if you're within 10 years of retirement, I'm surprised you to the loan approved at all.

 

Theres been a massive transition from IO2P&I that's taken place, ~15-20% of all mortgages have converted inside a very short time frame.

Thats a massive drag on liquidity in the system, its a big macro impact and has been an underplayed explanation in economic conditions (consumption falls) & price falls. Very difficult to measure of course (consumption impact minimal when measured directly), but borrowers on mass are more worried and have reworked their cash flows as a result of a mass migration to P&I. I.e. they've gone from having large cash flow surpluses which incentives of reinvestment (during low rate conditions) to one where surpluses are smaller and incentives consolidation.

However, what we have categorically not seen (thus far), is a material increase in forced sales from this transition. This, if it did occur on a large scale, would be extremely dangerous. Of course, this makes sense. Origination of these loans were at higher rates than now & had more than adequate buffers in the assessments to cover for a repayment transition.

 

Question asked during painful refinancing process :

Wesucks banker: So MrsXXX what are your plans going into retirement?

Me: What retirement? Doesn't everyone have to work until they drop in this country? ( and i open my BIG BLUE eyes innocently...)

Wesucks banker: Yep! (Ok let me scurry back to the maximum answer the computer system can accept)