HM annual average default is misleading. Rather I prefer to look at cohort default across the full term. Taking HM forecasted stats for Grade "E", their default forecasts are approx 4.5% per annum, or 22.5% across a 5 year term. To validate this, taking the 2014 E grade performance off the "historical annual default rate tool "
https://www.harmoney.co.nz/investors/default-rates - shows that the cumulative default of E grade at 22.7% (and running to a similar place on 2015 and 2016 cohorts). Critically the definition of cumulative default is based on the number of loans
originally funded, not the loans outstanding.
How is the cumulative default rate calculated?
The cumulative default rate is calculated by dividing the total number of defaults by the total number of loans funded. For example in 2015, for grade C3, 447 loans were funded and 17 loans defaulted to the end of 2017 creating a cumulative default rate of 3.8%.
How that reads to me, is early repayment is not factored in. If HM were to publish annual default based on time in lent, the number would be significantly different. ie If 22% of your E grade loans are going to default, and 78% remain good - how are your stats going to look if 40% of the good ones repay early in the first 12 months!