Moody's says the Reserve Bank of Australia's (RBA) decision on 6 April to raise official interest rates by 0.25 percentage points to 4.25% is unlikely to prompt large increases in delinquencies or any downgrades in the Australian RMBS market.

"Indeed, it is fair to say that most mortgage borrowers can absorb much greater upside in interest rates," says Arthur Karabatsos, a Moody's vp and senior analyst. "While the central bank has been gradually tightening policy since late 2009 - as the Australian economy, particularly the housing market, has been one of the first in the West to rebound robustly from the global financial crisis - the impact on the repayment abilities of mortgage borrowers has been restrained."

Borrowers have already shown they can repay mortgages at even higher rates, while lenders have been tightening lending practices for some time, such as by requiring larger deposits, or down payments. Low unemployment and higher house prices are further mitigating the effects of higher interest rates, says Moody's.

"The latest rate rise is part of the RBA's goal of returning interest rates to more 'neutral' levels where monitory policy is neither stimulating nor constraining economic growth. The neutral setting is believed to be around 5%. If official interest rates rise a further 0.75 percentage points to this level, delinquencies in the Australian RMBS sector are unlikely to significantly increase," says Karabatsos.

The Moody's report notes that a level of 5% would still be 2.25 percentage points below the level reached in March 2008. On an A$300,000 mortgage, over 25 years, this 2.25-percentage-point relief means monthly savings of A$415 when compared to March 2008. The report says borrowers demonstrated they can service their mortgages at the higher level recorded at this date.

The two largest Australian mortgage lenders, Commonwealth Bank of Australia and Westpac Banking Corporation, both say that when rates fell from 7.25% between 60% and 70% of borrowers continued to make higher-than-required payments, building up a financial buffer that assists in preventing delinquencies.