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Mortgage arrears are likely to continue rising at a steady pace through a period of economic weakness.
CoreLogic has reported that mortgage arrears rose to 1.6 per cent in the March quarter of 2024, up from the COVID-19 low of 1 per cent (3Q22).
However, while this was the highest reading on mortgage arrears since 1Q21, the portion of loans falling behind on repayment schedules was slightly higher at the onset of COVID-19 at 1.8 per cent.
According to CoreLogic, the upwards trends in arrears have been influenced primarily by non-performing loans (90 days past due or when the lender does not expect the full amount), where the arrears rate rose to 0.93 per cent.
Arrears for this category were slightly higher than before the onset of the pandemic (0.92 per cent) and above the series average of 0.86 per cent.
Mortgage holders who are 30–89 days overdue on repayments made up 0.68 per cent of loans, up from 0.35 per cent in 3Q22, reaching the highest level since 2Q20. Arrears for this category were above the series average of 0.59 per cent but lower than levels recorded before the pandemic (0.86 per cent).
Tim Lawless, research director at CoreLogic, said a key factor in rising 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,” Lawless said.
“But there are other factors at play as well.
“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.”
Lawless further added that households are more sensitive to “sharp adjustments in interest rates, given historically high levels of debt, most of which is housing debt”.
Despite mortgage arrears being likely to continue to climb as the unemployment rate increases, household savings erode further, and ongoing economic easing, Lawless stated that “arrears are unlikely to experience a material ‘blow out’ unless labour markets weaken substantially more than forecast”.
The Council of Financial Regulators (CFR) recently stated that it continues to “closely monitor” risks to the country’s financial system from lending to households and businesses and assessed that those risks “remain contained”.
The council concluded that while household budget pressures persist, wrought by persistent inflation and high interest rates, the majority of borrowers have continued to honour their debt repayments.
However, members of the CFR have also observed that the cohort of borrowers falling behind on mortgage repayments, along with applications for hardship notices, has continued to climb, albeit from low levels.
[RELATED: More falling behind on repayments despite ‘contained’ lending risks]
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