Homeowners struggling to repay their mortgages are most likely to be found in the outer suburbs of Australia’s cities.
A new report from Moody’s Investor Service found that, on average, delinquency rates were lowest within five kilometres of Australia’s CBDs and highest in neighbourhoods 30 to 40 kilometres away from city centres.
Those living in outer suburbs had, on average, lower incomes than those in inner-city areas, which increased the likelihood of defaults and delinquencies. Higher mortgage loan-to-value (LTV) ratios in cities’ outskirts were also a factor.
In Australia’s capital cities, average incomes decreased the further the distance from the CBD, the report showed.
“People on lower incomes have less capacity to make mortgage repayments above the scheduled minimum payments, which means loan amounts are paid down slower and LTVs remain higher. Higher LTVs increase the risk of default and mean there is less equity in properties to absorb losses if defaults occur,” Ilya Serov, associate managing director at Moody’s Investors Service, said.
Mr Serov also noted residential mortgage-backed securities by non-bank lenders tended to have higher exposure to outer suburbs than those issued by banks.
While mortgage defaults were more likely to occur on the outskirts of cities, inner-city suburbs with a high proportion of investment properties were not immune to the risks.
Whereas rising house prices had previously aided the performance of inner-city property investment, a turn in the property market meant borrowers faced increased pressure, particularly in cities like Sydney, Melbourne and Brisbane, where there was a high proportion of interest-only loans and 50 per cent of mortgages were extended for investment reasons.
“The performance of investment and interest-only loans is more sensitive to housing price declines than owner-occupier and principal and interest loans, because borrowers rely on price gains to earn a return on their investment,” Mr Serov said.
While delinquencies and defaults were expected to stay higher in outer suburbs, Moody’s noted that a surge in inner-city borrowers unable to repay their mortgages was a possibility in the event of a prolonged downturn in property prices.
Overall Moody’s expects a “modest” increase in delinquency rates for residential mortgage backed securities for the rest of 2018 and into 2019.