Australia's high debt levels, deteriorating macroeconomic conditions and the conversion of interest-only mortgages to principal and interest loans will see delinquencies continue to rise over the remainder of this year, says Moody’s Investors Service.

The 30-plus day delinquency rate for prime Australian residential mortgage-backed securities (RMBS) increased by 10 basis points during the second quarter of this year, reaching 1.67 per cent in June from 1.57 per cent in March this year.

Moody's vice president and senior analyst Alena Chen says Australia's record-high levels of household debt – at almost 200 per cent of annual gross disposable income – will continue to contribute to a moderate increase in delinquencies over 2019.

“Worsening economic conditions will also play a part,” Chen said.

“In August, we lowered our real GDP growth forecast for Australia to 2.3 per cent from 2.5 per cent for 2019.”

The unemployment rate increased to 5.3 per cent in August from 5.2 per cent in July. The RBA aims to have the unemployment rate at at least 4.5 per cent to put upward pressure on wage growth.

But defaults and losses are expected to remain low, largely supported by interest rate cuts and regulatory changes, Moodys says.

At its Tuesday meeting the Reserve Bank decided to cut interest rates 25 basis points to the new 0.75 per cent low, marking the third interest rate cut this year.

A trend towards higher unemployment and a slowdown in jobs growth were the primary factors in the RBA’s decision to cut to the historic low.

Other supportive factors include the removal of the 7 per cent interest rate buffer for residential mortgage lending by the Australian Prudential Regulation Authority in July.

Moody's expects delinquency rates will only rise moderately, while defaults and losses will remain low, given recent interest rate cuts and regulatory changes that increase mortgage refinancing prospects.

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