The buffer means many borrowers looking for refinance are being assessed as if they would be charged an interest rate well north of 8 per cent.
Barrenjoey’s survey suggests that about 24 per cent of borrowers may be in this position, which is broadly consistent with figures provided by National Australia Bank chief financial officer Gary Lennon a few weeks ago.
Mott sees financial stress building for these borrowers. “We expect mortgage arrears to rise sharply over the next 12 months to 18 months as these customers revert to higher interest rates and these loans season.”
The banks have a few options, including moving some customers on to interest-only loans, extending their loan periods – which Mott calls an “extend-and-pretend” strategy – or encouraging some customers to sell up.
“However, in our view, it is inevitable some customers will not be able to meet their higher repayments and a rise in credit impairment will likely be seen,” he adds.
“That said, we believe it will take until around the end of this calendar year until we have a good indication as to how severe this impairment cycle is likely to be.”
Locked-up mortgagees are one problem – but at least they’re in the market. The Barrenjoey survey reveals another group are locked out of the market completely because higher rates mean they simply cannot get the size of loan they want. Brokers said about 25 per cent to 30 per cent of borrowers fall into this category.
Mott’s contention is that instead of setting their sights on cheaper or smaller properties, these borrowers are staying out of the market entirely. As such, the recent stabilisation (and gentle rise) in house prices is therefore being driven by a relatively small number of wealthier customers buying more expensive homes.
He says data showing home loans sales in NAB’s private bank growing faster than its main retail bank also supports the theory it is the rich driving house prices.
Barrenjoey’s survey also suggests wealthier customers that can move to another bank will do so, with brokers expecting 50 per cent of customers would jump to a new lender when their cheap fixed-rate loan ends. The banks say retention rates are running closer to 80 per cent, but Mott questions what discounts the banks may be offering to keep these borrowers.
The Barrenjoey survey further supports the idea, put forward by Citi analyst Brendan Sproules this week, that rising house prices are a false flag and should not be taken as good news for the banks.
Indeed, all the Barrenjoey survey results are bad news for lenders.
The mortgage prisoners are likely to push bad debts higher, albeit from historically low levels. Those locked out of the market will weigh on credit growth, which Mott sees falling from last May’s peak of 8 per cent to between 2 per cent and 3 per cent.
And the willingness of wealthier customers to switch lenders (aided by their brokers, it should be noted) will further weigh on banks’ net interest margins because the banks will be forced to offer discounts to retain borrowers. NIMs peaked at the start of the year, and are expected to keep falling.
The housing sector is a strange place right now. Not only might we get to a point where the economy enters recession with house prices rising, but the Barrenjoey data says those rising prices are hiding a huge gap between the haves and have-nots.
