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Australian borrowers in good shape to weather higher interest rates

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Many Australian borrowers are making progress on their mortgage payments, which should save them from a hard landing as interest rates rise, according to Shane Elliott, chief executive of Australian bank ANZ. .

The Reserve Bank of Australia has raised the official discount rate to 2.6% for the sixth time in a row this year, raising mortgage rates from lows of around 2% to around 5%-6%. Australia’s housing sector will bear the brunt of higher interest rates as the central bank battles inflation.

Elliott said Thursday on CNBC’s “Squawk Box Asia” that many borrowers will be able to weather these changes, citing about 70% of ANZ’s customers with floating rates are accelerating their repayments. rice field. That way, as interest rates rise, there will be less pressure on borrowers’ cash flows.

“In the last 10 to 20 years, interest rates have come down, so people were using their savings to pay it off,” Elliot said.

“Today, 70% of our customers are in the process of making their mortgage payments, and half of those 70% are two years or more ahead.”

“Rising interest rates for many of these customers hasn’t changed anything. Why? They’re shortening their expected repayment terms.

Delinquency rates will rise over the next year due to rising interest rates, rising cost of living and falling real estate prices.

However, those with fixed rate mortgages can face stress when mortgage repayments skyrocket in the years after the fixed term ends. Given the 3% buffering of loan applications, most people should be able to cope, Elliott added.

In 2019, Australia’s financial regulator, the Australian Prudential Regulation Authority, instructed banks to apply. A loan “utility buffer” of at least 2.5 percentage points before rising to 3 percentage points in 2021.

We have implemented a 2% buffer since 2014. As part of efforts to manage risks, including containing a runaway housing market benefiting from historically low interest rates and high levels of household debt at the time. Mortgages accounted for the bulk of bank lending.

However, the rise in mortgage rates for many borrowers was close to the applied buffer. The RBA said at its monetary policy meeting earlier this month:.

The central bank noted that high levels of savings during the pandemic and a strong labor market with high incomes have eased debt serviceability concerns.

“Coupled with the tolerance of some borrowers, loan delinquencies have reached low levels,” the RBA said in a statement.

Elliot agreed, saying ANZ’s customers were “very solid” and heading into uncertain times.

Many Australian borrowers are front-loading their mortgage repayments and this should ease them from a hard landing as interest rates rise.

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He said customers are not only paying off their mortgages by increasing their savings, but they are also paying off other loans such as credit card loans. Wages for many customers have also caught up with inflation, he added.

“We are very confident in our mortgage books. The bite will be delayed because of all the factors I talked about,” he said.

“As of today, the number of people who are stressed by being 90 days behind on their mortgage payments is starting to drop.

In a report this week, Moody’s said that while delinquency rates declined in most Australian states over the 12 months ending in May, “higher interest rates, higher cost of living and lower interest rates will likely lead to higher arrears rates over the next year.” I predict it will,” he said. property price. ”

“Falling home prices will increase the risk of mortgage delinquencies and defaults because a weakening housing market will make it difficult for financially distressed borrowers to sell properties at prices high enough to pay off their debts,” Moody’s said. is difficult to sell,” Moody’s said.

House prices fell 6.1% in Sydney, 3.7% in Melbourne and an average of 4.1% across Australia in the September quarter, according to Moody’s.

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