Investors demanding risk premium on residential mortgages as macro conditions sour
Australia’s mortgage market is once again being tested by a tougher macro backdrop – elevated inflation, the spectre of stagflation and a messy war in the Middle East that risks hobbling consumer sentiment.
Despite US president Donald Trump taking to the airwaves to proclaim that the US-Israel-Iran war should be over in a matter of 'two to three weeks”, the ripple effects of the conflict are likely to be felt for months – perhaps years – to come.
This is now having an immediate impact on the funding markets.
David Bailey (pictured), chief executive of ASX-listed mortgage aggregator and alternative lender AFG, told MPA that spreads on the residential mortgage-backed security (RMBS) market have started to widen “as investors reprice risk in a more uncertain macro environment and liquidity tightens”.
RMBS spreads measure the extra return investors require for investing in Australian home loans instead of risk‑free government bonds. When investors perceive the home loan market as riskier, they demand a higher yield relative to the government bond rate.
But Bailey said this is only natural. “Importantly, that repricing is largely driven by market conditions rather than a significant deterioration in underlying credit. In fact, from an investor standpoint, it is improving the relative value of the asset class.”
Bailey continues to see solid demand for high-quality Australian RMBS, particularly in senior tranches.
AFG Securities recently settled its largest-ever RMBS, a jumbo $1.2 billion issue that was upsized from $750 million.
“Strong demand across all tranches of notes highlights the depth of our RMBS program and reinforces the positive sentiment towards Australian RMBS more broadly,” Bailey said at the time of the issue.
AFG is not the only one getting good results from the debt markets.
MA Financial subsidiary MA Money priced its first RMBS of 2026 at $1.25 billion, having upsized it from a flat $1 billion.
Granite Home Loans’ parent company ColCap Financial, meanwhile, announced Australia’s largest-ever RMBS by an Australian non-bank lender in February, coming in at $2.7 billion.
“Investors recognise the strength of the collateral and the structural protections embedded in these transactions,” said Bailey.
These deals were, however, closed prior to the onset of the war.
In the current economic climate, Bailey emphasised the need for “disciplined lending”, stating: “Ensuring borrowers can service their loans not just today, but through the cycle, is critical. Maintaining that consistency in credit approach is what positions us well in environments like this.
While Bailey expects to see continued volatility in funding markets and a gradual normalisation in credit metrics, “the fundamentals of the Australian RMBS market remain strong and liquidity remains robust”.
He added: “Periods like this tend to reinforce the resilience of the asset class and, importantly, create attractive long-term opportunities for investors. Ultimately, this is an environment that rewards discipline, and that’s exactly where AFG’s focus remains.
“The Australian mortgage market has been through multiple cycles and has consistently demonstrated its resilience.
“Higher interest rates will put pressure on household cashflows, and the conflict in the middle east simply adds to the inflationary pressures which existed well before the conflict commenced. At the same time, borrowers are adapting. Many have built up savings buffers through offset and redraw facilities, and even in more challenging conditions, borrowers remain highly committed to meeting their obligations.”
