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Arrears remain at historically low levels and are expected to trend lower, according to Cotality, as rate cuts ease mortgage pressure.
The share of borrowers who are overdue or “impaired” on their mortgage repayments inched up through the March quarter, according to data from property data and analytics company Cotality, but arrears remain at historically low levels.
In the March quarter, arrears rose marginally from 1.64 per cent to 1.68 per cent, according to data from the prudential regulator.
Mortgage arrears for borrowers with a loan-to-value ratio of 80 per cent or higher peaked at circa 2.5 per cent in 2024, but are now falling and borrowers with a loan-to-income ratio above four reached around 1.5 per cent at that time and are also now trending lower.
In Cotality’s (formerly CoreLogic) Pulse report, released today (25 June), research director Tim Lawless said mortgage arrears remained ‘contained’ despite high interest rates and cost-of-living pressures and are likely to trend lower as rates drop further.
Lawless said that the 1.68 per cent in arrears remained “well below pandemic-era peaks and international benchmarks”.
Why have arrears stayed low?
Tighter serviceability buffers, low levels of risky lending, and strong employment have all helped households stay on top of repayments, according to Cotality, even as monthly mortgage costs have risen.
Less than 1 per cent of borrowers are in a negative equity position, meaning most households in hardship can sell before defaulting, preventing widespread mortgage stress, Lawless said.
“Several factors help explain how the vast majority of mortgagors have kept on top of their mortgage repayments during a period of elevated interest rates and severe cost of living pressures, including strong prudential standards, tight labour markets, extremely low levels of negative equity, and accrued liquidity buffers,” he added.
The mortgage serviceability buffer has played into the resilience of borrowers. Lifting the buffer from 2.5 percentage points to 3.0 percentage points in October 2021 has helped lower the default risk, according to Cotality, even though mortgage rates have risen by more than 3 percentage points since the emergency low settings from 2020–22.
Commenting on how brokers can help clients before arrears escalate, Cotality economist Kaytlin Ezzy told The Adviser: “Broadly, a broker can assist borrowers that are struggling by helping them to understand their options and guide them towards the options that best suit the individual’s financial circumstances.”
What will more cuts do to arrears?
Despite enduring cost-of-living pressures, Cotality expects arrears to trend even lower as interest rates fall, reinforcing the strength of Australia’s mortgage market.
Reflecting on the months ahead, Ezzy told The Adviser: “With further rate cuts expected in 2025, it’s likely we’ll see mortgage arrears rates flatline or decrease in the coming months.
“While many households’ saving buffers have been drawn down by cost-of-living pressures and the high-interest rate environment, inflation is now sitting within the RBA’s target band, and further rate cuts will provide some slack for stretched household budgets.
“Additionally, with housing values once again trending higher, for existing borrowers the risk of a negative equity position will likely further diminish, putting additional downwards pressure on arrears.”
The continuing rate-easing cycle has helped reduce debt serviceability pressures on borrowers, particularly as the majority of Australia’s mortgage borrowers are on variable rates.
Cotality research flagged the ability of households to act out the ‘wagyu and shiraz’ scenario, where households pull back on non-essential spending to focus on debt repayments and fund essential cost-of-living expenses.
Lawless said he expected lower rates to help ease mortgage pressure going forward.
“Overall, it’s likely mortgage arrears will trend lower from here as mortgage rates continue to reduce and cost of living pressures ease further,” he added.
“With housing values once again on a broad-based rise, instances of negative equity are expected to remain a tiny portion of Australian housing stock, providing further resilience to default.”
[Related: Rate cuts to drive down mortgage arrears]
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