2024 will be another year of record issuance. Uncertainty on the geopolitical, inflationary, and interest rate fronts has not dampened enthusiasm for Australian residential mortgage-backed securities (RMBS). The sector's popularity is testimony to the resilience of collateral performance through economic cycles, the agility of issuers to recalibrate when necessary, and investors' appetite for relative value--a longstanding attribute of the sector.

Increasing global uncertainty and the lagging effects of monetary policy could tilt risks to the downside over the coming year. But RMBS performance should remain mostly stable if the labor market remains mostly robust. We forecast unemployment to rise to 4.4% in 2025.

Economic And Demographic Trends

Higher interest rates are hurting some households, but most people are managing so far. Australia's economy has been robust despite macroeconomic headwinds, particularly on the employment front. While the economy has slowed, with higher rates and cost-of-living pressures weighing on consumer demand, the general resilience of many households and the business sector has kept things ticking along.

Returning inflation to target is challenging, complicated by Australia's lackluster productivity growth and current fiscal policy settings. Wage price growth has slowed, but it will be difficult to sustain at its current pace without higher productivity growth, as recently outlined by the Reserve Bank.

As Australia is yet to commence monetary easing, the expectation of higher for longer is becoming more entrenched, thanks to labor market resilience, persistent inflation, and increasing global uncertainty. Adding to global uncertainty is how trade and immigration policies by the upcoming U.S. administration affect disinflationary momentum in the U.S. (see "Asia-Pacific Credit Outlook 2025," Nov. 13, 2025).

We predicate our economic forecasts for Australia (table 1) on the assumption that inflation will take time to return to its target range, while the economy and labor markets continue to grow, albeit at a slower pace.

Table 1

S&P Global Ratings' Economic Indicators
	2025f	2026f	Effect on collateral
Real GDP growth (%, year average)	2.1	2.2	Positive. We expect GDP growth to improve with lower interest rates. Sentiment is improving as the household sector has been mostly resilient to cost-of-living pressures and higher interest rates.
Unemployment rate (%, year average)	4.4	4.6	Negative. Strong labor market conditions have kept defaults low but rising unemployment will put pressure on debt serviceability for some borrowers.
CPI (%, year average)	3.1	2.9	Neutral. Inflation is decreasing, but we don't expect it to fall back within the 2%-3% target range until 2026.
Policy rate (%; EOP)	3.85	3.35	Positive. We think the tightening cycle has peaked, but persistent inflation and increasing global uncertainty are likely to keep rates higher for longer, with eventual rate cuts likely to be gradual.
f--Forecast. EOP--End of period – Q4 values. Source: S&P Global Ratings.

Low unemployment a bulwark against rising defaults

Despite the pain caused by monetary policy, labor markets have remained resilient, with the unemployment rate still at historically low levels (chart 1).

Unemployment is a lagging indicator, so we haven't yet seen the full impact of consecutive interest rate rises on the labor market. A robust jobs market with solid jobs growth has underpinned household resilience, despite cost-of-living pressures and higher interest rates. Even youth unemployment, typically a front runner of a slowing economy, is below decade averages, with the unemployment rate for 15- to 24-year-olds at 9.2% in October. We forecast unemployment will rise to 4.4% in 2025. This is still below prepandemic levels.

Low unemployment has kept arrears modest and tempered the transition from arrears to defaults amid higher interest rates. Loss of income, caused by unemployment, is a key reason for mortgage defaults.

A pause in interest rate rises is helping to stabilize arrears

The transmission effects of monetary policy decisions are relatively swift in Australia, given its high proportion of variable-rate mortgages. This feature increases the correlation between interest rates and early arrears. Official cash rate rises can take around 3-4 months to be passed on to borrowers.

The pause in rate rises since November 2023 has given borrowers a reprieve, enabling them to reprioritize spending patterns to accommodate higher mortgage repayments.

The transition of ultralow fixed rates, underwritten during the pandemic, to higher variable rates is mostly completed. The transition has been relatively seamless, with minimal evidence of payment shock in arrears and loss reporting. Because the Australian RMBS sector has a quite modest exposure to fixed-rate loans of around 10%, the transition has had little effect on RMBS collateral performance.

Refinancing conditions remain competitive, but the peak in refinancing activity has passed, with the rollover of most fixed-rate mortgages mostly complete.

Hardship levels, a leading indicator of mortgage stress, have risen with higher interest rate rises and cost-of-living pressures. The Australian Securities and Investment Commission (ASIC) has increased its scrutiny of lenders' hardship practices to ensure they have appropriate arrangements in place to respond to and support consumers experiencing financial hardship. As demonstrated through COVID-19, hardship periods give borrowers a reprieve from financial stress, allowing time to remedy their financial situation, if possible. Across the Australian RMBS sector, the level of hardships reported has been rising, but this has not flowed through to material increases in arrears or defaults. Rising property prices will have enabled some borrowers to voluntarily self-manage their way out of financial hardship through property sales because equity is likely to have been built up in properties over time.

Population demographics

Immigration plays an important role in Australia's population growth and will continue to do so, given forecast declines in fertility rates and an aging population. Net migration returned strongly after COVID-19 with the reopening of borders. Temporary visa holders make up a large proportion of overseas migrant arrivals, and a significant proportion of temporary visa holders are international students (around 51% in 2022-2023, according to the Australian Bureau of Statistics). International student arrivals remain high. International student arrivals in September 2024 were 4.3% higher than pre-COVID-19 levels. Australia's migration intake and future net overseas migration will be sensitive to these trends (chart 2).

Millennials on the cusp of home ownership

Millennials, defined as people currently aged between 25 and 39 years of age, make up around 21.5% of Australia's total population, according to the latest Census. Their stage in life, income profile, and employment trajectory has economic and housing implications. According to Australian Bureau of Statistics data, approximately 40% of people aged between 25 and 34 are in home ownership versus around 60% nationally (chart 3). Housing affordability pressures could delay home ownership aspirations for many millennials, given the high price barrier to entry. This cohort of prospective borrowers is also likely to be more highly leveraged, given property's high price tags in many of the capital cities, adding to household indebtedness.

First-home ownership has been increasingly supported by the "bank of mum and dad" in these age cohorts, given the significant deposit requirements relative to incomes.

Lone-person households are increasing

Lone-person households made up around 27% of total households in June 2024, up from 24% a decade earlier. This is contributing to a decline in average household size, which decreased to 2.49 in June 2024 from 2.58 a decade earlier. These trends are likely to increase demand for housing.

Housing affordability and lifestyle preferences influence intrastate migration

Interstate and overseas migration rates are key drivers in the demand for residential properties and housing finance in Australia. People move between states and territories for reasons such as employment, lifestyle, and the cost of housing.

In terms of net overseas migration, New South Wales and Victoria are the most common states for immigrants to enter the country (chart 4). This is significant because the point of entry has a strong correlation with where migrants decide to reside.

According to Federal Government Budget forecasts, Victoria will be the fastest-growing state over the next decade (chart 5). The data projects New South Wales to grow more slowly than the other eastern states, while remaining the most populous state.

Stronger population growth adds to housing demand pressures. The different population growth trajectories across the states also influences property price dynamics.

The Australian Housing Market

Home ownership is less affordable for new entrants to the property market

Australians have an enduring relationship with home ownership. More than two-thirds of Australian households live in owner-occupied dwellings, but the rate is declining (chart 6).

The changes reflect a prolonged period of strong property price growth that has reduced housing affordability. Higher interest rates and strong population growth have added to such pressures for prospective homeowners. This trend has forced more people to rent for longer and has increased household indebtedness.

Private ownership of rental stock is also high in Australia. According to statistics from the Australian Bureau of Statistics (ABS), about 21% of Australian households own a residential property other than their primary place of residence. Homeowners who own multiple properties are more likely to reside in New South Wales and Victoria and are more highly represented in higher income quartiles. Greater private-sector ownership of rental stock also increases overall household indebtedness because many households have both owner-occupier and investor loans.

Detached housing is still the most desirable dwelling type for most Australians

According to the Australian Bureau of Statistics, 70% of all Australian dwellings are standalone, detached houses. The remainder are semidetached or duplex houses, row or terrace houses, townhouses (13%), or flats and apartments (16%). The percentage share of higher-density accommodation has grown in recent years. It is likely to continue to grow, given medium- to high-density accommodation is typically more affordable than detached dwellings. Medium- and high-density dwellings have longer lead times than detached housing, though. This can add to housing supply and demand imbalances. Despite increased efforts by some state governments to ramp up medium- and high-density development, dwelling approvals for units remain below decade averages, given higher construction and financing costs.

Constrained housing supply is putting a floor under property prices

Property price growth has moderated in Australia as affordability constraints dampen demand and interest rates remain elevated.

We forecast property prices to grow around 6%-7% in 2025. This is based on our expectation of gradual rate cuts in 2025, continued population growth, muted forecast rises in unemployment, and persistent gaps in supply relative to population growth.

The key factors affecting supply and demand are outlined in chart 7.

Property price dynamics vary across the states as reflected in the diverging median property prices of the larger capital cities (chart 8).

This divergence reflects different demographic and local economic factors. For example, a resurgent resources sector in Western Australia is accelerating property price growth in Perth, while higher property taxes in Victoria is increasing cashflow pressures for investors.

The participation of investors in relation to first-home owners across property markets will also influence property price dynamics. First-home owner participation increases when government grants are generous and property prices are decreasing, making property more affordable. Investor participation meanwhile is typically instigated by the prospects of capital gains and favorable tax environments. Investor participation can amplify property price dynamics.

While lower interest rates should improve sentiment and affordability across the country, local economic conditions and interstate population trends could see more divergence across property markets in 2025.

Rising property prices and modest loan-to-value (LTV) ratios across most RMBS have kept losses low, despite rising arrears.

Household Balance Sheets

Household indebtedness increases systemic risks

Household debt as a percentage of net household disposable income is high in Australia compared with many other Organisation for Economic Co-operation and Development (OECD) countries (chart 9).

Most of Australia's household debt is tied up in property assets (chart 10). Rising property prices add to household indebtedness by increasing the amount of debt required to purchase a property. Higher household indebtedness adds to systemic risks by elevating economic imbalances. While property prices are not directly managed by regulators, the increasing use of macroprudential measures can indirectly affect property price dynamics by altering the supply and demand of housing credit.

Australian household debt is also elevated because the household sector owns the rental stock and hence the debt used to fund it. In most other countries, a significant share of rental properties and the associated debt belongs to the government or corporate sectors. Household indebtedness has different facets, depending on the borrower profile (chart 11).

A growing share of savings held in offset accounts is offsetting these liabilities. According to Reserve Bank of Australia data, around 46% of housing loan accounts have an offset account where surplus funds are invested, and interest repayments offset by interest earned on funds invested. Offsets provide a highly liquid form of saving because the interest saved on offset balances is tax free. According to the Reserve Bank, borrowers have continued to add to offset and redraw accounts at a similar rate to before the pandemic, despite significant increases in mortgage repayments for many borrowers. This has aided debt serviceability by reducing interest burdens and bolstering household balance sheets.

Despite Australia's high household indebtedness, personal bankruptcies in Australia are low by international comparisons. Underpinning this is:

• Australians' traditionally strong willingness to repay debt.
• The severe consequences of bankruptcy under local law.
• The stigma associated with bankruptcy.
• The difficulty in accessing finance after bankruptcy.

Even in bankruptcy, housing-loan lenders continue to have recourse to borrowers to pursue outstanding debts alongside a borrower's other creditors after the collateral property is sold.

Lending standards are broadly similar across most RMBS lenders

Bank and nonbank lenders' underwriting policies and procedures for residential mortgages are of a relatively uniform and high standard throughout Australia (table 2). This is primarily due to Australia's prudential regulatory framework, consumer credit legislation, the nature and maturity of the mortgage market, and the extensive use of lenders' mortgage insurance, though this is declining. The standards mainly focus on establishing a borrower's capacity and willingness to pay and the quality and value of the underlying security.

Serviceability buffers are a key area of difference in lending standards between banks and nonbanks. Australian Prudential Regulation Authority (APRA) requires banks to apply a 3% buffer in debt-serviceability assessments. Because APRA does not directly regulate nonbanks, they can apply lower thresholds. Nonbank interest rate buffers range between 1.5% and 2%.

Table 2

Key Features Of Australian Prime RMBS Lenders' Underwriting Standards
Uniformity	Lending standard
High
	Interest rate buffer of 1.5%-3% used in debt-serviceability calculations
	No mortgage broker involvement in credit underwriting
	Interest rate is higher of floor and loan rate + buffer
	Expenses based on higher of benchmark index or declared living expenses
	Alignment to LMI underwriting standards if LMI is used
	Interest-only loans assessed on an amortizing basis over residual loan term
Moderate
	Income shading to variable income sources
	Property valuation types used
	Utilization of HEM as a benchmark index
	Expense categories in loan systems
Low
	Floor lending rates used in debt-serviceability calculations
	Use of auto credit-decisioning tools in lending process
	Override exception limits/tolerances. These are very lender specific
	LTV ratio cap restrictions
Note: This information is based on our operational review assessments that include a review of lending processes and credit policies. HEM--Household expenditure measure. NSR--Net income surplus income ratio. LMI--Lenders' mortgage insurance. DTI--Debt-to-income. CCR--Comprehensive credit reporting.

The Role Of Lenders' Mortgage Insurance

Most prime residential mortgages securitized through the RMBS market in Australia historically were fully mortgage insured under a primary or pool mortgage insurance policy. Under the primary policy, LMI providers typically underwrite each loan individually. A pool policy is one taken out mainly for securitization purposes and, as the name suggests, is underwritten on a pool basis, generally when the loans have LTV ratios below 80%.

The underwriting and servicing standards imposed by the mortgage insurers traditionally have had a strong bearing on the policies and procedures of lenders using the RMBS market.

The use of LMI across the Australian RMBS sector has been declining, given the reduction in higher LTV lending across the broader mortgage market.

The Australian Residential Mortgage Loan Market

There are now more than A$2.5 trillion worth of home loans outstanding in Australia, of which about 5% are securitized (chart 12).

Banks continue to be the main providers of housing finance in Australia. Nonbanks are not directly regulated by APRA. Their lending activities have to be in compliance with the National Consumer Credit Code, which is overseen by the Australian Securities & Investments Commission. In addition, APRA's reserve powers allow it to regulate the lending activities of nonbank lenders if they become large enough to pose a material risk to the financial system.

Competition for prime mortgage borrowers has moderated, with refinancing activity below its pandemic peaks. Larger lenders dominate, given their funding cost advantages, forcing many nonbanks to pivot to more niche lending segments. Many nonbanks have diversified their product offerings to include higher credit risk borrowers, auto lending, and more esoteric lending such as to self-managed superannuation funds (SMSFs) and nonresidents.

This has led to a greater volume of asset-backed securities issuance in 2024, particularly from nonbanks (chart 13). Competitive funding costs and strong demand from investors has contributed to a record year of issuance in 2024. We expect 2025 to be another strong year of issuance, provided funding costs remain competitive. New issuance momentum will be sustained by the faster pay down of RMBS, requiring investors to regularly reinvest in new offerings.

Borrowers are incentivized to pay down their loans faster because most home loans in Australia are variable rate and mortgage repayments for owner-occupier loans are not tax deductible. This increases refinancing activity because borrowers are motivated to seek out more competitive mortgage rates. These attributes increase prepayment rates for Australian RMBS relative to other securitization markets.

Performance Of Australian RMBS

The Australian RMBS sector has exhibited strong collateral performance over a long period, as evidenced by low arrears and losses. Some of the fundamental characteristics of the Australian market that underpin the credit quality of residential mortgage loans are:

• The full-recourse nature of loans to borrowers, which promotes borrower accountability.
• The consumer credit legislation, which promotes lender accountability.
• The uniformity and generally high standards of the underwriting policies.
• A strong home-ownership ethos.
• The rarity of severe downturns in nominal property prices across the country and a prolonged period of relatively benign economic conditions.

Relatively low unemployment levels and most loans' modest LTV ratio exposures have limited defaults and losses in the event of borrower default. Low unemployment is pivotal to strong collateral performance. This is because the major causes of default in Australia are typically:

• Personal crises, most commonly marital disputes, illness, and death.
• Loss of income, commonly caused by job loss; a decrease in paid overtime; decrease in commissions; or the loss of a second job.
• Loan affordability, predominantly due to interest-rate increases or other commitments.

A close alignment between lending policies and LMI guidelines has also contributed to low claims adjustment rates in the Australian RMBS sector, reinforced by a general tightening in lending standards since late 2014.

S&P Global Ratings each month publishes a suite of arrears charts, which are available at https://www.spglobal.com/sfsurveillance.

The Standard & Poor's Performance Index (SPIN) measures weighted-average arrears that are 30 or more days past due.

Charts 14-19 show performance trends for key credit metrics for the Australian RMBS sector.

APPENDIX

Loan lifecycle

A typical Australian housing loan will follow a similar course during its lifecycle (chart 20).

Mortgage arrears process

For loans that fall into arrears and are unable to become current, the following steps may also become a feature of the loan lifecycle (chart 21).

The mortgage loan originator generally undertakes mortgage servicing in the Australian market. Outsourcing some or all of the servicing functions to third parties is becoming more common, however. Servicing in Australia is generally high quality by global standards. The extensive application of technology and electronic funds transfer arrangements are features of the Australian market.

Property-valuation methods

Property valuation methods are typically based on the associated credit risk of the loan. More automated methods are used for lower LTV loans. When underwriting a mortgage loan, Australian lenders will value a property using one of several methods, including:

• Full valuations: Undertaken by qualified valuer and generally used for riskier loans.
• Curbside or drive-by valuations: Valuations based on an estimate of the property by viewing it from the street.
• Automated valuations: Statistically based valuations derived through a registered valuer.
• Contract of sale, valuer-general assessments, council rate notices, historical sales price data: Used only for lower LTV ratio loans to substantiate borrowers' estimate of property value.

Many lenders will identify the type of valuation used for the specific property in their loan level data. S&P Global Ratings applies higher default multiples to less-comprehensive valuation methods.

Housing-Loan Product Types

The home-lending market has been subject to high levels of competition, and product innovation has become one of its key features. Most lenders offer standard housing-loan products with a wide range of options.

Standard housing loan

The standard housing loan in Australia is a fully amortizing principal-and-interest loan, with a term of 25-30 years, secured by a first-ranking registered mortgage over the borrower's home. The interest rate on a standard housing loan is typically a variable rate that can be altered at any time, at the lender's discretion.

The common features of a standard housing loan in Australia are outlined in table 3.

Table 3

Standard Loan Product Options
Loan type
Prime loans	Loans made to borrowers with a clean credit history. Prime loans traditionally are eligible for LMI.
Nonconforming loans	Loans made to borrowers who typically would not qualify for a residential mortgage from a traditional prime lender and are generally ineligible for LMI. For example, borrowers that are not necessarily credit impaired, but might not be able to provide standard loan documentation or their loan size could be larger than standard limits.
Subprime loans	Borrowers who are typically credit impaired.
Loan purpose
Purchase a home
Refinance	Refinance an existing home loan.
Debt consolidation
Equity take out	Use equity in a property to release cash for investment and consumer purposes.
Construction loan	Not included in structured finance transactions.
Property occupancy
Owner-occupier	Loan is for home purchase.
Investor	Loan is not for the primary place of residence. The investor property classification includes holiday/second homes.
Payment features
Redraw	Redraws permit borrowers to redraw any funds paid ahead of the scheduled amortized balance of the loan.
Further advance	Further advance allows a borrower to request additional funds through a variation of the mortgage. Lender usually undertakes a full credit assessment at the time of the further advance.
Line of credit	Borrowers receive a line of credit secured against their homes. The limit is generally fixed, and borrowers can draw up and down against the limit as they please. Repayments are less regular.
Interest-offset accounts*	Noninterest-bearing deposit account directly linked to the loan. The lender notionally reduces the balance of the loan account by the amount of funds held in the offset account for the purpose of calculating interest payments.
Interest rate types
Fixed	Interest rates on fixed loans are usually fixed for a period of up to five years. Loan rate switches to variable after this point.
Variable rate	Discretionary variable-rate loans. Lending practices in Australia recognize and account for borrower exposure to interest-rate changes through the incorporation of interest-rate buffers in debt serviceability assessments.
Split rate	The loan is split into two or more accounts and the rate on each account may be either fixed or variable.
Repayment options
Amortizing	Both principal and interest repayments are made over the remaining term of the loan.
	Both principal and interest repayments are made during the remaining term of the loan.
Interest only	The interest-only period normally ranges between five and 10 years.
Bullet loans	The borrower is required to pay all or a significant portion of principal by loan maturity date. This is not a common loan type in Australia.
Documentation type
Full documentation	Loans for which the borrower's income has been fully verified by the lender through reference to relevant source documents such as pay slips or tax returns.
Limited documentation	Loans for which the borrower's income has not been fully verified by the lender. Limited-documentation loans are often referred to by a variety of terms, including self-certified and stated-income loans.
Note: *In RMBS transactions, the seller usually pays the interest-offset amount into the trust during each payment period. If this arrangement is not in place, increased liquidity support and interest-rate mechanisms may be used to mitigate liquidity and yield risks.

Nonstandard housing loan

Table 4

Nonstandard Loan Product Options
Loan type
Reverse-mortgage loans	Enables borrowers to access equity in a property. Repayment of the loan is not required until the property is sold. Sale of the property occurs at the earlier of the borrower's death, contractual breach, or when the owner ceases to occupy the home.
Loans to self-managed superannuation funds (SMSFs)	Limited-recourse borrowing, whereby the trustee holds legal title of the property on trust. Incomes sources are limited, and include superannuation contributions, rental income from the mortgaged property, and investment income of the fund.
Nonresident loans	Loans to nonresident borrowers secured by properties located in Australia.

Documentation standards

Documentation standards in RMBS are generally classified as either full or limited (income partially verified). S&P Global Ratings classifies low- and alternative-documentation loans as "limited." Low-documentation product standards differ. In Australia, they include an element of supporting evidence of income and are not solely reliant on a stated income. Such products are targeted at self-employed borrowers. While they are considered lower documentation, they are not written on a stated-income or no-income verification basis.

Table 5 provides examples of the common income-verification documentation standards in the Australian residential mortgage market.

Table 5

Australian Mortgage Documentation Standards
	Full-doc PAYG	Full-doc self-employed	Low doc	No doc*
Income documentation required	Last two pay slips, and letter of employment, tax assessments, three months' bank statements or similar	Last two years' tax returns and last two years' tax assessment notices	ABN/GST registration for 12 or six months, declaration of financial position, and six months' business bank statement, six months' BAS or similar	Declaration of affordability
Note: *Not a feature of the Australian residential mortgage lending market. PAYG--Pay as you go.

Australian Legal And Regulatory Systems Applicable To RMBS

Generally speaking, the Australian legal system is a common-law system similar to the U.K., comprising statutory law and case-law components. Property and consumer-lending laws regulate the rights and obligations of borrowers and lenders.

Land title and registration

Most privately owned land in Australia is recorded on a comprehensive, state-based register with a unique title registration number assigned to each parcel of land known as the Torrens Title system.

All dealings with land, such as transferring or granting of a mortgage should be noted on the title. A registered interest can only be defeated if it was registered with fraudulent intent. The priority between competing interests in land typically will be determined by referring to when they were registered. In most cases, the first interest to be registered will prevail.

The title-registration process ensures a low-risk environment for purchasers and lenders, provided basic due diligence is undertaken. In most cases, the due diligence process is performed by an approved solicitor, the lender's staff, or a title insurer. Due diligence primarily involves obtaining and checking the registrar's copy of the certificate of title and other publicly available information.

Most residential properties are held on freehold title, except in the Australian Capital Territory, which has long-term leasehold interests. Different forms of titles, such as strata and leasehold titles, also can be included in securitized pools. Strata titles are similar to the U.S. condominium titles. When they are included in securitization pools, leasehold titles typically have terms that are at least 15 years in excess of the term of the securitized mortgage.

Enforcement process

Australian real property legislation prescribes a process for enforcement and recovery of defaulted mortgages. This involves the issuance of written default notices and giving the borrower a maximum timeframe to remedy the default. If the default is not remedied within the prescribed time, the lender is entitled to sell the property and recover the debt.

Personal Property Security Act (PPSA)

In Australian securitizations, a special-purpose entity typically grants a security for the benefit of the holders of the rated security. Under the Personal Property Securities Act, general security agreements require registration to perfect the security.

Personal recourse

Lenders in Australia have personal recourse or "full" recourse against borrowers for any shortfalls in their recoveries of mortgage loans. Lenders have the right to obtain court orders to access any of a borrower's other assets or to have the borrower declared bankrupt.

Set-off

In the context of residential mortgage lending, set-off can occur in two ways:

• Equitable set-off, which may be exercised at any time.
• Insolvency set-off, which may be exercised on the insolvency of one of the parties.

Most mortgage loans seek to avoid the risk of equitable set-off by including a term whereby the borrower agrees not to set off any payments due under the loan against any amounts due by the lender to the borrower.

Insolvency set-off can occur when a deposit-taking institution lends money to a borrower who has funds deposited with that institution. If the lender becomes insolvent, the borrower may set off his or her deposit against the outstanding loan. However, a borrower's right to insolvency set-off will be eliminated on assignment of the loan to a special-purpose entity. The assignment breaks the required mutuality between the borrower and the lender.

Taxation issues

Stamp duty:  Depending on the states and territories involved, purchases and sales of real estate in Australia may be subject to stamp duty. The rate of stamp duty varies among states and territories and by the purpose of the property. In most cases, however, it is levied on the gross purchase price.

Land tax:  Investment properties are subject to land tax which is an annual or quarterly tax owners pay to state and territory governments based on the value of the land they own.

Interest deductibility:  Interest on mortgage loans used to finance owner-occupied properties in Australia is not tax deductible. In contrast, interest paid on loans used to finance investment properties that generate rental income are tax deductible.

Capital-gains tax:  Any gains realized on the sale of a borrower's primary place of residence are free from tax. However, any gain realized on the sale of an investment property is subject to capital gains tax.

Key regulations governing the Australian mortgage market and RMBS

National consumer credit regime:  Consumer credit law reforms have resulted in a single national consumer credit regime governed by the National Credit Protection Act 2009 (Cth) (NCCP) administered by ASIC.

It applies to all contracts for the supply of credit to individuals or strata corporations for the following:

• Personal, domestic, or household purposes.
• To purchase, renovate, or improve residential property for investment purposes.
• To refinance such debt.

The National Credit Code imposes a code of conduct on lenders, which dictates a range of conditions, such as minimum disclosure requirements. Other conditions cover interest-rate charging and adjustment mechanisms; procedures for contract variations, including on the basis of financial hardship as a result of illness, unemployment, or other reasonable causes; and enforcement procedures.

Unfair contract terms:  Under the code, the terms of an "unjust" contract may be reassessed by a court in certain circumstances, such as when a lender has used unfair tactics, or when a lender knew or failed to determine that the borrower could not afford to repay the loan. An unfair contract term will be void, but the contract will continue if it is capable of operating without that term.

Hardship provisions:  Hardship concessions can include a reduction in the interest rate or payment, lengthening of loan maturity, or full or partial deferral of interest for a temporary period.

Under APRA's prudential practice guidance for hardship loan arrears reporting, arrears would continue to accrue, based on the original scheduled payments, until the loan is brought back into performing status.

Banking regulation - APS 120:  APRA regulates securitization activities of authorized deposit-taking institutions (ADIs) through its Prudential Standard APS 120. The Prudential Standard requires ADIs to adopt prudent practices to manage the risks related to securitization and to ensure that appropriate capital is held against that risk.

Related Criteria

• Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
• Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Asia-Pacific Supplement, April 4, 2024
• Australian RMBS Rating Methodology And Assumptions, Sept. 1, 2011

Related Research

• Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon, Nov. 24, 2024
• Australian RMBS And The Growing SMSF Factor, June 24, 2024
• Asset Price Risks: Income And Residential Property Values Diverge For Australian RMBS And Covered Bonds, March 24, 2024
• How Resilient Are Australian RMBS Ratings To Rising Arrears? June 5, 2023
• Why Servicer Transition Risk Is Low In The Australian Structured Finance Sector, April 30, 2023

Primary Credit Analyst:	Erin Kitson, Melbourne + 61 3 9631 2166; erin.kitson@spglobal.com
Secondary Contacts:	Kate J Thomson, Melbourne + 61 3 9631 2104; kate.thomson@spglobal.com
	Narelle Coneybeare, Sydney + 61 2 9255 9838; narelle.coneybeare@spglobal.com