Why it soon might be even harder to get a loan

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Fresh from the case-by-case relaxation of the mortgage stress test, it seems Australia’s biggest credit companies intend to tighten their approval criteria following an increase in the number of borrowers doing it tough.

A survey of 75 finance and telco companies, Experian’s annual Risk Radar Report, has revealed two-thirds have witnessed an increased risk of consumer defaults and hardship in the past six months.

Australia’s biggest credit companies intend to tighten their approval criteria following an increase in the number of borrowers doing it tough.Credit: iStock

Almost all (96 per cent) of the surveyed credit risk leaders believe it is likely borrowers will experience increased hardship in the next 12 months. Nine in ten forecast higher credit stress, and more missed repayments and delinquencies.

As such, the report says more than half (57 per cent) have recently strengthened risk measures to better protect their organisations.

Experian also analysed the data of the 19 million credit active Australians that the bureau holds; this analysis is telling because, for 18 months now, it has been listed on a person’s credit file if they have a financial hardship arrangement in place – so trends are now evident.

And there are calming and concerning ones.

“Those below age 25 have seen the most severe change in missed payments – we are seeing them get more stressed more quickly.”

In a one-on-one last week with Experian’s director of client advisory, credit services – Charlotte Rankin – shared with me that delinquencies plateaued for the months when interest rates fell.

“Whilst it’s flattened in mortgages, we are seeing a month-on-month increase which matches with a slight uptick in payment data,” Rankin told me.

Many people don’t realise that you have only 14 days’ grace before it is recorded on your credit file that you have been late with a credit repayment. A ‘1’ is recorded if you are late by 15 to (up to) 31 days.

The number goes up in every subsequent month that your payment remains outstanding – ‘2’ in month two, ‘3’ in month three, etc – until you get an ‘x’ after month six, or after 180 days. That is what is considered a delinquency.

Rankin says: “There are not many of those, which is good.” But there is no need to let it even get to the ‘1’ stage.

If you simply cannot pay – or you can only pay with a delay – you need to tell your credit institution and ask for a financial hardship arrangement first… so they can make allowances for you. But I will come back to that.

Sadly, Rankins reports it is generally younger people missing payments, who perhaps don’t have the savings buffer to fall back on.

“Those below age 25 have seen the most severe change in missed payments – we are seeing them get more stressed more quickly,” she says.

The next under-pressure group are people with newer mortgages. Though that mortgage stress test I mentioned earlier was raised from 250 basis points to 300 basis points on concerns about rocketing house prices and rock-bottom rates at the end of 2021, it seems many have still been caught out.

“New mortgages, where people opened them in 2020, 2021 or 2022, those are where we are seeing higher rates of missed payments coming through,” Rankin says. “Some of the regional areas are also struggling a bit with house price drops affecting them a bit more.”

Although late rental payments are not recorded on your credit file, Experian sees that people without mortgages are slipping behind on other credit payments, implying rent rises are pushing some tenants to the brink. Again, younger people are the most vulnerable.

A surprising fact is that missed payments are still below where they were pre-COVID. “They haven’t come above where we were before COVID,” Rankin reports.

The thing is that in COVID because there were so many hardship arrangements in place, few payment breaches were recorded… although at that time, there was no legislation covering how these should be recorded when there were payment concessions (organisations could still have blemished your credit file).

Now we have the ‘financial hardship’ designation appearing where there is a formal agreement, we will know far more accurately how many people get stretched too financially far. And increasing expectations of more rate hikes make this far more likely.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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