Key takeaways
Regardless of excessive rates of interest and cost-of-living pressures, only one.68% of Australian house loans are in arrears, properly beneath pandemic-era peaks and worldwide benchmarks.
Tighter serviceability buffers, low ranges of dangerous lending, and robust employment have helped households keep on prime of repayments, whilst month-to-month mortgage prices have surged.
Unfavorable fairness stays uncommon, with lower than 1% of debtors in a adverse fairness place. Most households in hardship can promote earlier than defaulting, stopping widespread mortgage stress.
As rates of interest start to fall and cost-of-living pressures ease, arrears are anticipated to development even decrease, reinforcing the power of Australia’s mortgage market.
Whereas mortgage arrears have risen from document lows, the portion of debtors falling behind on their repayments stays properly beneath 2% of the Australian mortgage ebook.
APRA information measuring the proportion of debtors who’re overdue or impaired on their mortgage repayments ticked barely increased by the March quarter, from 1.64% in This autumn 2024 to 1.68% in Q1 2025.
Regardless of the refined elevate, mortgage arrears stay beneath the current excessive of 1.86% recorded in Q2 2020.
Mortgage arrears embrace loans which might be 30-89 days overdue in addition to these categorised as non-performing.
A non-performing mortgage is one the place the borrower is 90 days or extra overdue on their repayments or the place the lender considers the borrower unlikely to pay their credit score obligations with out recourse from the lender.
A extra detailed breakdown of mortgage arrears will be discovered within the newest Monetary Stability Evaluation from the RBA.
The overview confirmed that whereas extremely leveraged debtors and lower- earnings households are inclined to have increased arrears charges, even in these classes, arrears are typically low and trending decrease.
Mortgage arrears for debtors with a mortgage to valuation ratio of 80% or increased peaked round 2.5% in 2024 however are actually falling, whereas debtors with a loan-to-income ratio above 4 reached roughly 1.5% and are additionally trending decrease.
A number of components assist clarify how the overwhelming majority of mortgagors have saved on prime of their mortgage repayments throughout a interval of elevated rates of interest and extreme price of residing pressures, together with sturdy prudential requirements, tight labour markets, extraordinarily low ranges of adverse fairness, and accrued liquidity buffers.
Lending requirements have been unquestionably sturdy all through the current cycle, with a persistently low portion of mortgage originations thought of ‘dangerous’.
Curiosity-only lending comprised 19.7% of originations within the March quarter and has persistently held properly beneath the earlier momentary restrict of 30% set by APRA between 2017 and 2018.
Excessive LTI and excessive DTI lending stays properly beneath pre-rate hike ranges, monitoring at 3.1% and 5.8% of mortgage originations respectively in Q1.
Equally, excessive LVR lending has are available in round 7% of originations or decrease since mid-2022.
The mortgage serviceability buffer, which assesses potential debtors on their capacity to repay a mortgage at three share factors above the present mortgage charge, has additionally performed into the resilience of debtors.
Lifting the buffer from 2.5 share factors to three.0 share factors in October 2021 has helped to decrease the default danger, though mortgage charges have risen much more than three share factors from their 2022 lows.
Though rates of interest are actually falling and anticipated to scale back additional, there was no signal from APRA that the serviceability buffer will likely be lowered.
Whereas tight lending insurance policies have contributed to monetary stability and supplied safety for debtors, there’s a counter argument that lending insurance policies could also be too tight, decreasing entry to credit score.
The ‘double set off’ speculation for increased mortgage charges
The RBA has beforehand theorised that increased mortgage arrears charges would have to be predicated by a “double set off” of each an lack of ability to repay the mortgage and for the mortgage to be in a adverse fairness place.
Up to now, most debtors have retained their capacity to pay regardless of increased debt servicing prices, due to persistently tight labour market situations, whereas cases of adverse fairness stay uncommon throughout the Australian housing market.
Debt servicing prices have risen considerably over the current charge cycle.
Variable mortgage charges have roughly moved in-line with the money charge, bottoming out beneath 3% in 2022 earlier than surging by round 4 share factors.
A borrower with a $750k mortgage noticed their month-to-month repayments rise by round $1,550+ (relying on the kind of borrower and mortgage) between the low level and excessive level of the charges cycle.
Nonetheless, most Australian’s have retained a capability to service their mortgage by gainful employment, with labour markets holding tight.
The unemployment charge got here in at 4.1% in Might and has held round this degree or decrease since early 2022.
Equally, underemployment, which measures staff who wish to work extra hours, stays near multi- decade lows.
The second part of the ‘double set off’ speculation pertains to adverse fairness in housing markets – or just, the place the worth of property is lower than the debt owed.
The RBA estimated of their most current Monetary Stability Evaluation that lower than 1% of households are experiencing a adverse fairness state of affairs.
Given the low portion of houses in adverse fairness, most debtors going through monetary hardship ought to be capable to promote their property and clear their debt earlier than transferring into default.
One other issue staving off increased arrears pertains to an accrual of financial savings by the pandemic
The family saving ratio held above 10% between mid-2020 and early 2022.
Households have been in a position to attract down on their financial savings as increased debt servicing prices and value of residing pressures eroded stability sheets.
Though it is more durable to measure, we now have most likely additionally seen households tightening the purse strings, appearing out the “wagyu and shiraz” situation, the place households pull again on non-essential spending, deal with debt repayments and fund important price of residing bills.
The “wagyu and shiraz” reference pertains to the federal court docket ruling from Justice Nye Perram within the ASIC v Westpac listening to: “I could eat Wagyu beef on a regular basis washed down with the best shiraz however, if I actually need my new house, I could make do on far more modest fare.”
General, it’s seemingly mortgage arrears will development decrease from right here as mortgage charges proceed to scale back and value of residing pressures ease additional.
With housing values as soon as once more on a broad-based rise, cases of adverse fairness are anticipated to stay a tiny portion of Australian housing inventory, offering additional resilience to default.
