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Lower interest rates could help cut mortgage arrears and reignite refinancing activity.
Interest rate cuts and steady inflation are likely to bring down mortgage arrears and help keep them at historically low levels, according to S&P Global Ratings.
In its RMBS Performance Watch: Australia, the credit rating agency reported that prime residential mortgage-backed securities (RMBS) arrears were 0.97 per cent in the first quarter of 2025, up from 0.87 per cent in the previous quarter.
However, S&P said arrears increases over the first quarter are cyclical, reflecting higher spending patterns over the Christmas and summer holiday period.
Non-conforming arrears were 4.39 per cent in the three months to 31 March, up from 4.18 per cent in the final quarter of 2024.
Prime investor arrears were at 0.75 per cent in the first quarter compared with 1.16 per cent for owner-occupiers.
Investors have benefited from the ability to offset higher mortgage repayments against higher rentals, S&P said.
In comments to The Adviser, S&P Global Ratings analyst Erin Kitson said: “While cost-of-living pressures may persist, low unemployment and falling interest rates will help keep mortgage arrears low.
“Discretionary expenditures are often the first casualty of cost-of-living pressures. Homeowners typically prioritise mortgage repayments over most other expenditures.”
Rate cuts ease mortgage stress
The latest interest rate easing cycle has helped ease debt serviceability pressures on borrowers, according to S&P, with this expected to continue should the Reserve Bank of Australia (RBA) make more rate cuts going forward.
S&P said that easing pressure on debt holders will enable most households to remain current on their mortgages, given Australia’s mostly variable-rate mortgage market.
However, S&P said it did not foresee a “material difference” to overall arrear levels because cuts are likely to be gradual.
“Forecast modest reductions in the cash rate will help alleviate debt serviceability pressures, given the RMBS sector’s high variable-rate exposures,” Kitson said.
S&P is forecasting the cash rate to drop to 3.60 per cent by year end.
Household spending takes a back seat
Heightened global uncertainty and its effect on global trade will impact business and consumer confidence, affecting investment and consumer spending decisions, according to S&P.
Households are likely to behave more cautiously, choosing to save or pay down mortgages over spending, despite easing interest rates and relatively low inflation. This will help keep arrears low.
Kitson said global uncertainty “may elicit more cautious behaviour from the household sector”.
She said: “It might influence spending and saving patterns in the months ahead as borrowers navigate a more uncertain economic outlook.”
Speaking to The Adviser on spending patterns going forward, Kitson said: “How this trend plays out depends on households’ perception of the economic landscape amid heightened global uncertainty.
“Lower interest rates will help boost consumer confidence, but how much this translates to spending over saving or paying down debt is yet to be seen.”
Refinancing reignites
Rate cuts also could boost refinancing rates, S&P said, with the potential for lenders to capitalise on improving consumer sentiment by offering more competitive mortgage rates.
“Lower interest rates could also energise refinancing levels as lending competition ratchets up,” Kitson said.
Looking ahead, S&P said that increasing competition from banks for prime borrowers, along with more non-bank lenders entering the market, will increase competition for low-documentation loans and other specialist lending products.
[Related: Pressure on mortgage holders expected to ease: RBA]
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