RISING MORTGAGE ARREARS IN AUSTRALIA: A TEMPORARY WAVE OR EARLY WARNING?

Mounting Pressure on Borrowers Amid Economic Headwinds 

Australian homeowners have begun to feel the strain of elevated interest rates and rising living costs, with mortgage arrears showing a noticeable uptick in early 2025.

Yet, analysts remain optimistic, pointing out that the figures are still low by historical standards and well below global averages.

A recent analysis by credit ratings agency Fitch Ratings revealed that the proportion of mortgage holders more than 30 days behind on repayments climbed by 23 basis points in the first quarter of the year, reaching 1.35%.

For borrowers with non-conforming loans—typically those with lower credit scores or irregular income—the arrears rate surged to 5.32%.

Fitch explained that, although mortgage arrears tend to rise slightly after the holiday period, this year’s jump was nearly three times the historical average.

The agency attributed the spike to the combined burden of persistently high interest rates and sustained inflationary pressure that has stretched household finances.

Cotality Analysis: Arrears Still ‘Constrained’ Despite Rising Costs 

Property research firm Cotality (formerly CoreLogic) offered a slightly more reassuring perspective.

It reported that, while rates and inflation have undeniably intensified the pressure on borrowers, mortgage arrears remain low and constrained.

According to Cotality’s data, a borrower with a $750,000 home loan would have seen their monthly repayments increase by approximately $1,550 between the lowest and highest points in the current interest rate cycle.

Nevertheless, most borrowers have managed to keep pace with these elevated repayments.

Tim Lawless, Cotality’s Research Director, noted: The recent increase in arrears does not signal a crisis.

We’re still witnessing exceptionally low delinquency levels when viewed in the context of past economic cycles.

Regulatory Data Reinforces Stable Mortgage Health 

Additional figures from the Australian Prudential Regulation Authority (APRA) support this relatively stable outlook.

APRA’s records show that the portion of impaired or overdue home loans rose to 1.68% in the first quarter—up slightly, but still below the 1.86% peak recorded during the height of the COVID-19 pandemic in Q2 2020.

Importantly, this rise occurred before the Reserve Bank of Australia (RBA) introduced interest rate cuts following the end of Q1.

Fitch and other analysts anticipate that these cuts, combined with an expected additional cut later this year, will ease mortgage burdens and help limit further arrears increases.

Why Mortgage Arrears Remain Contained 

Several key factors have helped to keep mortgage delinquencies in check despite macroeconomic turbulence:

• Tighter Lending Standards: Banks have maintained rigorous lending criteria throughout recent years. Loans considered “risky” have comprised only a small share of new mortgage originations.
• Serviceability Buffer: The mortgage serviceability buffer—set by APRA—requires lenders to assess whether borrowers can afford their repayments at interest rates three percentage points above the current rate.
• This safety net was increased from 2.5 to 3.0 percentage points in 2021 and has significantly reduced default risks.
• Strong Labor Market: With an unemployment rate at 4.1% and low underemployment, Australians remain largely able to service their loans even amid rising costs.
• Responsible Lending Mix: Interest-only loans made up less than 20% of total lending in Q1 2025.
• High loan-to-income and high debt-to-income ratios also remained well below historical averages—3.1% and 5.8% respectively.
•  Household Savings Cushion: Elevated savings during the pandemic have given many households a financial buffer.
• Cotality reports that between mid-2020 and early 2022, the household saving ratio exceeded 10%.

Interest Rates: The Next Move 

The RBA’s monetary policy board is scheduled to meet on July 7–8, and financial markets have priced in an 80% probability of an interest rate cut.

A reduction could provide further relief to mortgage holders, particularly those who entered the property market during the height of the interest rate cycle.

Experts suggest that while inflation remains a concern, a slowdown in global demand and domestic consumption might give the central bank the leeway to begin easing policy.

Any such move would help mitigate mortgage stress in vulnerable households.

Housing Market Outlook: Prices Still on the Rise 

Despite growing mortgage pressure, Australia’s housing market is showing no signs of a downturn.

On the contrary, home values are forecast to climb to record highs in 2025–26.

Domain’s Price Forecast Report predicts that the median house price in Sydney will soar by 7% over the next year, reaching $1.83 million by June 2026.

This represents an increase of $112,000 in just one year—surpassing the average annual income of full-time Australian workers ($103,000).

The price surge is being driven by several supply and demand dynamics:

First-Home Buyers Squeezed Out 

For first-time buyers, the situation is becoming increasingly difficult.

The average national home price has breached the $1 million mark for the first time, according to the Australian Bureau of Statistics (ABS).

This pricing milestone, while reflective of strong property demand, also underscores the affordability crisis faced by younger Australians and lower-income families.

As homeownership moves further out of reach for many, the rental market is expected to come under additional strain.

Experts Advise Vigilance, Not Panic 

Despite the upward trend in mortgage arrears, financial analysts and credit agencies have been cautious in their messaging.

Rather than sounding alarms, they recommend continued observation and proactive fiscal planning.

We are not seeing signs of a systemic risk to the housing market, said Mr Lawless. 

As long as employment remains strong and inflation begins to ease, the majority of borrowers will stay current on their repayments.

Conclusion: Resilience Amid Rising Costs 

In conclusion, while mortgage arrears in Australia have experienced a moderate increase in early 2025, the data suggests a resilient housing sector backed by prudent lending, strong employment, and pandemic-era savings.

With anticipated interest rate cuts on the horizon and real estate prices poised to rise further, borrowers may find some breathing room.

However, policymakers and lenders must remain alert, ensuring that emerging pockets of financial stress do not snowball into broader economic issues.

The next decision from the Reserve Bank will be pivotal—not just for mortgage holders, but for the broader Australian economy.