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Australian borrowers in good standing to withstand higher interest rates


ANZ says: Retail customers are going through a period of uncertainty with a 'very solid situation'

According to Shayne Elliott, managing director at major Australian bank, ANZ, many Australian borrowers are ahead and this will help them avoid a hard landing as interest rates rise.

The Reserve Bank of Australia raised its official cash rate six times in a row this year to 2.6%, forcing mortgage rates from a low of around 2% to around 5% to 6%. The Australian housing sector will bear the brunt of higher interest rates as the central bank battles inflation.

Elliot told CNBC’s “Squawk Box Asia” on Thursday that many borrowers will be able to weather these changes, citing that about 70% of ANZ’s customers with variable rates have accelerated repayment. That will reduce cash flow pressure on borrowers when interest rates rise.

“When interest rates have fallen over the last 10 to 20 years, what people have done is they use their savings to pay off debt first,” Elliot said.

“As of today, 70% of our customers are prepaying their home loan and of that 70%, half of which are more than two years old.”

“As interest rates go up for many of those customers, nothing’s changed. Why? They’re reducing the down payment period up front. The customers are in pretty good shape.”

The delinquency rate will increase next year due to rising interest rates, a strained cost of living and falling property prices.

But for those with fixed-rate mortgages, they could face some stress as their mortgage repayments soar in the years to come after their fixed terms come to an end. . Even then, most people should be able to cope provided banks in Australia have increased mortgage applications by 3%, Elliot added.

In 2019, Australia’s financial regulator, the Australian Prudential Regulatory Authority, required banks to apply “serviceability buffer” lends at least 2.5 percentage points before it rises to 3 percentage points in 2021.

It has implemented 2% cache since 2014 as part of risk management efforts, such as preventing a runaway housing market from benefiting from historically low interest rates at the time as well as high levels of household debt. Home loans make up a large portion of bank loans.

However, the increase in mortgage rates for many borrowers has moved closer to the applied buffer zone, RBA said in 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 allayed concerns about solvency.

“This, along with the prohibition on some borrowers, has resulted in low loan arrears,” the RBA said in its statement.

Elliot agrees, saying ANZ customers are entering an uncertain time in “very, very strong shape.”

Many Australian borrowers are paying off their mortgages ahead of time, and this will save them from a hard landing as interest rates rise.

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He said customers not only increased their savings and paid off home loans, but also other loans such as credit card loans. The wages of many clients have also kept pace with inflation, he added.

“We’re very confident about our home loan book. The home purchase will be delayed because of all the factors that I’ve talked about,” he said.

“As of today, people who are under stress with their 90-day delinquent home loans are starting to drop. So we’ve yet to see a single pickup truck crash.”

Moody’s said in a report this week that while loans in the 12 months ending May fell in most Australian states, it predicts that “crime rates will increase next year as interest rates rise. , the cost of living strained and fell. real estate prices.”

“Falling home prices will increase the risk of debt and home defaults, as a weakening housing market will make it harder for financially challenged borrowers to sell their properties at prices high enough to sustain them,” Moody’s said. pay”.

According to Moody’s, in the September quarter, house prices fell 6.1 per cent in Sydney, 3.7 per cent in Melbourne and an average of 4.1 per cent across Australia.

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