The number of Australians falling behind on their mortgages will rise in the next two years as interest-only loans end and repayments get more expensive, ratings agency Moody's has warned.
Delinquencies on loans that have converted from interest-only to principal and interest are running at double the rate of those still on interest-only, Moody's said in a report released on Thursday.
"When IO (interest-only) loans convert to P&I (principal and interest), borrowers have to make higher monthly repayments, and this 'payment shock' can lead to mortgage delinquencies and makes IO loans riskier than P&I loans," Moody's said.
Repayments jump by around 30 per cent when mortgages convert to principal and interest, the agency said.
Currently, the delinquency rate for mortgages converted to principal and interest is 0.94 per cent - a rate also above the arrears rate for all mortgages.
"Refinancing interest-only mortgages is also becoming more difficult, which will in itself contribute to an increase in mortgage delinquencies," the ratings agency said.
About 40 per cent of loans by Australian banks in 2014 and 2015 were interest-only for five years, meaning a large portion are set to come under pressure with higher repayments in 2019 and 2020, said Moody's.
