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Why Australian mortgage delinquencies could be about to rise and hurt ASX banks

The rate of Australian mortgage delinquencies could be about to rise according to credits ratings agency Moody’s. This could have potentially major consequences for the ASX banks.

Commonwealth Bank of Australia (ASX: CBA) has been showing a slow-and-steady increase in 90 day customer arrears on their mortgages. The other banks of Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) have seen a similar trend.

However, Moody’s said that interest-only loans changing to principal & interest will likely cause a moderate increase in mortgage delinquencies. High debt levels and falling house prices won’t help either, according to the ratings agency.

Moody’s revealed that its own stats show almost 1% of loans that had switched to principal and interest were 90 days or more overdue, which is double rate of interest-only loans.

Some figures suggest that there is over $350 billion that’s going to convert from interest-only loans over the next three years. Whatever the exact figure, it’s huge amount of money where up to 40% of all loans were interest-only in 2015.

However, with the prospect of not being able to refinance another interest-only term and repayments increasing by at least 30%, it seems some property investors may be in a tight spot.

The Australian household savings rate has fallen to its lowest level in the past decade, dropping to less than 2% this year. I can’t imagine many households will easily afford an extra $5,000, $7,000 (or more) of higher payments. That’s if they own just one property, if they own several it’s a lot more expensive!

The simple answer would be to sell a property, but falling prices and a depressed auction clearance rate won’t make that easy.

Foolish takeaway

A lot of ‘could’ and ‘what if’ scenarios don’t end up being as bad as it looks. Things have a habit of working out. Even the GFC, which was terrible, is already a decade in the past.

But, stats don’t lie – if the facts say that mortgage delinquencies are rising and prices are declining then it’s definitely not a good thing for various stakeholders like the property owners, and state governments who partly rely on stamp duty receipts.

I am a firm believer in the long-term futures of many ASX shares like Challenger Ltd (ASX: CGF) and Costa Group Holdings Ltd (ASX: CGC). But, I’m hesitant on the ASX banks and quite afraid for over-leveraged property investors.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended Challenger Limited and COSTA GRP FPO. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.