Will mortgage rate hikes boost Australian banks' bad loans?

Small banks have been lifting out-of-cycle mortgage rates in recent months.

With smaller Australian lenders raising out-of-cycle mortgage rates to meet profit margins after a housing downturn, Moody’s Investors Service is waving off concerns that the move might result in rising slippages and bad loan burden.

“Despite the very high level of household leverage in Australia, we do not expect the current round of home loan rate moves to cause a material increase in loan delinquencies or credit costs,” the credit rating agency said in a report.

Australia’s labour market conditions, which are often used to indicate mortgage performance, also remain robust as the economy’s outlook remains positive despite trade tensions in the East, Moody’s added.

Residential property prices in Australia have significantly slowed down after a steady heated uptrend from 4.2% in December to a measly 0.2% in April, with the Sydney home market contracting even further.

This has prompted credit growth to fall from a peak of 6.6% in April 2016 to 5.1% in March, according to BMI Research.

The rise in home loan rates also remain significant compared to the banks’ “buffer built into home loan serviceability assessments,” suggesting that lenders are well-capitalised to absorb potential losses.

Australian banks commonly assess borrowers’ repayment ability based on a minimum interest rate of 7.25%, which is well above the average home loan rate of around 5.25% posted by Australian banks over the past three years.