The postcodes most at risk of mortgage defaults as interest rates rise


A credit ratings agency has predicted a spike in mortgage defaults will particularly hit Australians in the outer suburbs of the big cities when interest rates keep rising. 

The Reserve Bank of Australia’s 0.25 percentage point increase last Tuesday – ending a record-low era where the cash rate was 0.1 per cent – is far from the last.

Two big banks – ANZ and Westpac – are expecting the RBA to raise rates seven more times by May 2023, which would take the cash rate to 2.25 per cent for the first time in eight years.

A 2.15 percentage point rise in a year would mark the fastest annual surge in the cash rate since 1994 – with maps showing the areas most at risk of mortgage delinquencies throughout the country.

More Australians in outer suburbs will struggle to repay their home loan as interest rates rise – causing mortgage defaults and a plunge in house prices, a credit ratings agency fears (pictured are residents at Campbelltown in south-west Sydney)

Big Four banks update RBA rate forecasts

WESTPAC: 2.25 per cent cash rate by May 2023

NAB: 2.6 per cent cash rate by August 2024

ANZ: 2.25 per cent by May 2023

COMMONWEALTH BANK: 1.6 per cent by February 2023

Source: RateCity 

Credit ratings agency Moody’s Investors Service said a series of rate rises would make it harder for many borrowers to repay their loans and cause a fall in real estate values.

‘The central bank’s rate rises will push up floating-rate mortgage interest rates, which will worsen borrowers’ capacity to repay debt and increase the risk of delinquencies and defaults,’ it said.

‘Interest rate rises will pose the most risk for mortgages with high balances and those where repayment amounts are close to borrowers’ maximum repayment capacity.’

Moody’s feared a fall in property prices would see struggling borrowers owe more than their property was worth, a situation known as negative equity where they can’t sell their home to repay their debt.

‘Interest rate rises will also weigh on house prices, which will add to risks of home loan delinquencies and defaults because of a weakening housing market will make it harder for borrowers in financial trouble to sell their properties at high enough prices to repay their debt,’ Moody’s said.

Sydney's south-west was particularly vulnerable during previous interest rate rises, with the proportion of borrowers falling behind on their repayments increasing

Sydney’s south-west was particularly vulnerable during previous interest rate rises, with the proportion of borrowers falling behind on their repayments increasing

Blacktown in western Sydney had a sharp increase in mortgage delinquencies when interest rates last rose

Blacktown in western Sydney had a sharp increase in mortgage delinquencies when interest rates last rose

Last year, Australian property prices climbed by 22 per cent – the fastest annual pace since 1989. 

The proportion of borrowers who are 30 days or more behind on their repayments has previously risen when interest rates have gone up and Moody’s is expecting that to happen again.

This would be particularly so in suburbs that already have higher mortgage delinquency rates, including pockets of south-west and western Sydney and northern Melbourne. 

‘Mortgage delinquency rates in Australia, which decreased in most states and territories in 2021, will increase moderately over the rest of 2022 because of rising interest rates and slowing property prices,’ Moody’s said.

Within a year, Australians with an average mortgage of $600,000 could see their monthly repayments surge by $713 to $3,019 should the cash rate hit 2.25 per cent.

This would see variable mortgage rates rise from 2.29 per cent to 4.44 per cent.

Variable mortgage rates are set to rise to 2.54 per cent in coming weeks, following the rise in the RBA cash rate by a quarter of a percentage point to 0.35 per cent. 

The RBA’s May rise was the first since November 2010.

But Moody’s data from the Global Financial Crisis in 2008 showed home loan delinquencies rose in many outer-suburban areas that traditionally suffer from higher mortgage stress.  

Sydney’s south-west was particularly vulnerable during previous interest rate rises, with the proportion of borrowers falling behind on their repayments increasing from 2.62 per cent in 2006 to 3.68 per cent in 2008 as the RBA cash rate increased from 5.5 per cent to 7.25 per cent, Moody’s data showed. 

Melbourne's north-west had higher mortgage delinquencies during the last rate rises in 2008

Melbourne’s north-west had higher mortgage delinquencies during the last rate rises in 2008

Rate rises and inflation in 1994 versus 2022

1994: Reserve Bank cash rate rose by 2.75 percentage points from 4.75 per cent to 7.5 per cent between August and December

Inflation doubled from 2 per cent in September quarter of 1994 to 5.1 per cent by September quarter of 1995

2022: Westpac and ANZ are expecting the RBA cash rate to rise by 2.15 percentage points from a record-low of 0.1 per cent to 2.25 per cent

Inflation in March quarter was 5.1 per cent – fastest pace in 21 years 

Mortgage delinquencies stayed high at 3.13 per cent in 2011 after the RBA raised the cash rate in late 2010 to 4.75 per cent, following a series of rises starting in 2009 as inflation climbed again.

This region of Sydney had the city’s highest arrears rate of 1.87 per cent in November 2021, before the banks put up their fixed mortgage rates. 

During that time, Blacktown in western Sydney saw its mortgage delinquency rate rise from 1.64 per cent in 2006 to 2.96 per cent in 2008, and hitting 3.09 per cent in 2011, after the 2010 RBA rate rise.

Its arrears rate of 1.24 per cent at the end of last year was among the highest in Sydney and more than double the delinquency level of the upmarket North Shore and Northern Beaches. 

Blacktown’s median house price of $914,350 in April, based on CoreLogic data, is beyond the reach of an average income earner.

With a 20 per cent deposit, a typical full-time worker on $90,917 would have a debt-to-income ratio of eight.

The Australian Prudential Regulation Authority deems six to be the mortgage stress threshold. 

In neighbouring Seven Hills, the median house price has risen above $1million. 

Even before the rate rise, housing advocacy group Everybody’s Home and Digital Finance Analytics identified western and south-west Sydney as the worst areas for mortgage stress. 

Mandurah south of Perth was particularly affected as the mining boom pushed up house prices

Mandurah south of Perth was particularly affected as the mining boom pushed up house prices

Melbourne also had pockets of mortgage stress, with delinquencies in the city’s north-west rising from 1.32 per cent in 2006 to 2.1 per cent in 2007 and 2.28 per cent by 2011.

The 1.65 per cent level late last year was Melbourne’s highest.

Mandurah south of Perth was particularly affected as the mining boom pushed up house prices with Moody’s data showing mortgage delinquencies rising from 0.3 per cent in 2006 to 1.91 per cent in 2008 and 4.11 per cent in 2011.

But its arrears rate of 1.58 per cent is now comparable with the rest of Perth.

In 2021, the Coffs Harbour and Grafton region on the New South Wales Mid-North Coast had the lowest mortgage delinquency rate of 0.38 per cent while the Northern Territory Outback had the highest rate at 2.58 per cent.

The Reserve Bank of Australia is expecting an increase in the cash rate to two per cent to cause a 15 per cent fall in property prices.

But its arrears rate of 1.58 per cent is now comparable with the rest of Perth

But its arrears rate of 1.58 per cent is now comparable with the rest of Perth

How YOUR mortgage repayments could surge under a 2.25 per cent cash rate

$500,000: Monthly repayments rising by $594 from $1,922 to $2,516

$600,000: Monthly repayments rising by $713 from $2,306 to $3,019

$700,000: Monthly repayments rising by $831 from $2,691 to $3,522

$800,000: Monthly repayments rising by $951 from $3,075 to $4,026

$900,000: Monthly repayments rising by $1,070 from $3,459 to $4,529

$1,000,000: Monthly repayments rising by $1,189 from $3,843 to $5,032

Calculations based on variable mortgage rates rising from 2.29 to 4.44 per cent in line with the cash rate increasing by 2.15 percentage points from a record-low of 0.1 per cent to 2.25 per cent

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