Australian Mortgage Arrears Increase Due to Interest Rates and Inflation, Experts Remain Unconcerned

The number of Australians falling behind on mortgage payments is on the rise, but experts say it is nothing to be alarmed about, as it comes off record-low levels.

Credit ratings agency Fitch Ratings found the number of home owners who are more than 30 days late on repaying their loans has risen by 23 basis points in the first three months of the year, up to 1.35 per cent. Arrears among borrowers with non-confirming mortgages (often those with a lower credit rating) rose to 5.32 per cent.

Fitch said while arrears usually rise at the start of the year, due to post-holiday financial pressure, this jump was almost three times the historical average. That was likely due to 'the cumulative strain of prolonged higher interest rates on households and persistent inflation stretching household budgets', according to Fitch.

However, property research firm Cotality (formerly CoreLogic) described arrears as remaining 'constrained', despite the pressure from rates and the cost of living.

According to Cotality, the string of rate rises over the past few years has meant a borrower with a $750,000 mortgage saw monthly repayments rise by around $1,550 between the low point and high point of the rates cycle. Cotality's research director, Tim Lawless, noted most borrowers were keeping on top of mortgage repayments, and the small rise in arrears from record lows was not concerning.

The research firm's report cited different data, from the prudential regulator APRA, that showed the portion of borrowers overdue or impaired on their repayments increased to 1.68 per cent in the first quarter, though well below pandemic-era peaks and international benchmarks. 'Despite the subtle lift, mortgage arrears remain below the recent high of 1.86 per cent recorded in Q2 2020,' Mr Lawless said.

Fitch noted that this year's interest rate cuts, delivered by the Reserve Bank after the first quarter data was gathered, as well as a predicted further rate cut this year, should help home owners weather the storm and keep a lid on any further rise in arrears.

Mr Lawless attributed the lower-than-expected rise in arrears to tighter lending buffers, less risky loans being issued, as well as strong employment rates despite the pressures of elevated interest rates and higher costs of living.

Cotality also attributed the low arrears rate to the mortgage serviceability buffer, a rate set by APRA that assesses prospective borrowers on their ability to repay a mortgage at three percentage points above the current mortgage rate. 'Lifting the buffer from 2.5 percentage points to 3.0 percentage points in October 2021 has helped to lower the default risk, even though mortgage rates have risen a lot more than three percentage points from their 2022 lows,' Mr Lawless said.

A further reason for low arrears is a strong labour market, allowing people to keep paying a mortgage even when repayments rise. May's unemployment rate was 4.1 per cent, and underemployment, which measures workers who want to work more hours, has also remained low. Cotality also noted that high household savings during the pandemic and an anecdotal tightening of household budgets may be helping mortgage borrowers stay afloat amid cost-of-living pressures.

After contracting in the last quarter of 2024 and then growing in the first quarter of 2025, Fitch Ratings predicted home prices to continue rising in 2025 thanks to limited housing supply, falling interest rates, and high net migration seen in the previous two years. The median house price in Sydney is forecast to jump by another 7 per cent in 2025-26, to $1.83 million by June 2026, according to Domain's latest Price Forecast Report.

The next decision on interest rates will be made by the Reserve Bank's monetary policy board on July 8. Financial markets are pricing an 80 per cent chance of an interest rate cut at that meeting.