Borrowers are increasingly falling behind on their mortgage repayments, with arrears hitting a three-year high.
CoreLogic Asia Pacific Research Director, Tim Lawless, said mortgage arrears had risen from their Covid lows of just 1 per cent in 2022, and have now hit 1.6 per cent in the March quarter of 2024.
He said the upward trend in arrears (90 days overdue) has been most influenced by non-performing loans, which have risen to 0.93 per cent.
The non-performing arrears rate is now slightly higher than it was at the onset of Covid (0.92 per cent) and above the average of 0.86 per cent.
Borrowers who are 30-89 days overdue on their repayments made up 0.68 per cent of loans, up from just 0.35 per cent in 2022 and at the highest level since 2020.
Mr Lawless said a key factor in higher mortgage arrears was the sharp rise in the cost of debt.
“With the average variable interest rate on outstanding owner occupier home loans rising from 2.86 per cent in April 2022 to 6.39 per cent in March 2024, a borrower with $750,000 of debt would be paying nearly $1,600 more each month on their scheduled repayments,” Mr Lawless said.
“Cost of living pressures are consuming a larger portion of household income, households are paying more tax than ever before and household savings are being drawn down, eroding the savings buffer accrued through the pandemic.”
He said there was also the fact that households are more sensitive to sharp adjustments in interest rates, given historically high levels of debt, most of which was housing debt.
“Loosening labour market conditions would also be playing a role,” he said.
Mr Lawless said it was important to note that most borrowers had kept on track with their home loan repayments.
“They have done this by drawing down on their savings, working more hours or multiple jobs, and contributing less to mortgage offsets or redrawn facilities,” he said.
He said it was likely mortgage arrears would rise further as unemployment lifts, household savings deplete and, more broadly, economic conditions navigate a period of weakness.
“However, arrears are unlikely to experience a material ‘blow out’ unless labour markets weaken substantially more than forecast,” he said.
“For home owners that do fall behind on their repayments, there is a good chance most will be able to sell their asset and clear their debt.
“The latest estimates on negative equity from the RBA estimate only around 1 per cent of residential dwellings across Australia would have a debt level that is higher than the value of the home.
“With housing values continuing to rise, the risk of negative equity is reducing.”
Mr Lawless said another factor in low mortgage arrears was likely to be a history of strong underwriting standards from Australian lenders and APRA.
“Borrower serviceability continues to be assessed at a mortgage rate 3 percentage points higher than the loan product rate, as has been the case since October 2021 when APRA lifted the serviceability buffer from 2.5 percentage points,” he said.
“With mortgage rates rising more than the assessment buffer, alongside cost of living pressures and a record level of household income being consumed by taxes, household balance sheets are being tested, especially for those who may have had more leverage or seen a change in their financial circumstances.”
Mr Lawless said there has been a rise in interest only lending along with high loan-to-income ratio borrowers.
“The portion of home loans originating with a deposit of 10 per cent or less have risen a little but still comprise less than 8 per cent of originations for owner occupiers and just 3.2 per cent of originations for investors,” he said.
“Overall, lending policies across Australia remain relatively conservative, with close to 70 per cent of borrowers obtaining housing credit with at least a 20 per cent deposit and where their loan amount or overall debt profile is less than six times their gross annual income.
“It’s likely lending policies will remain fairly cautious as the economy navigates a period of weakness punctuated by high interest rates and stubborn cost of living pressures.”
