Mortgage arrears rise from record lows, but risk of substantial increase remains low

Mortgage arrears in Australia have been rising from their COVID-19 pandemic lows of just 1.0% in Q3 2022, reaching 1.6% in the March quarter of 2024, according to CoreLogic’s latest report. Despite this being the highest reading since Q1 2021, the portion of loans falling behind on their repayment schedules remains slightly lower than the 1.8% recorded at the onset of the pandemic.

The upward trend in arrears has been most influenced by non-performing loans, where the arrears rate has risen to 0.93%, slightly higher than the 0.92% recorded at the start of the pandemic and above the series average of 0.86%. Borrowers who are 30-89 days overdue on their repayments comprise 0.68% of loans, up from just 0.35% in Q3 2022 but still below the 0.86% level recorded at the beginning of the pandemic.

The sharp rise in the cost of debt, with the average variable interest rate on outstanding owner-occupier home loans increasing from 2.86% in April 2022 to 6.39% in March 2024, is a key factor in the higher mortgage arrears. However, other factors such as cost of living pressures, increased tax payments, and the erosion of household savings accumulated during the pandemic are also contributing to the rise.

Despite these headwinds, most borrowers have managed to stay on track with their home loan repayments by drawing down on their savings, working more hours or multiple jobs, and contributing less to mortgage offsets or redraw facilities. While mortgage arrears are likely to rise further as unemployment increases and household savings deplete, a substantial “blow out” is unlikely unless labour markets weaken significantly more than forecast.

CoreLogic Research Director Tim Lawless attributes the low mortgage arrears to Australia’s strong underwriting standards and the prudential regulator, APRA. Lending policies across the country remain relatively conservative, with close to 70% of borrowers obtaining housing credit with at least a 20% deposit and a loan amount or overall debt profile less than six times their gross annual income.

As the economy navigates a period of weakness marked by high interest rates and persistent cost of living pressures, it is expected that lending policies will remain cautious. However, the risk of a substantial increase in mortgage arrears remains low, given the current lending landscape and the ability of most homeowners to sell their assets and clear their debt if they fall behind on repayments.