Slight uptick in arrears reflects borrower resilience
Mortgage arrears edged up in the March 2025 quarter but remain low by historical standards, according to data from the Australian Prudential Regulation Authority (APRA).
The share of home loans either past due or considered impaired rose to 1.68% of the total loan book in Q1, up slightly from 1.64% in the December 2024 quarter. Despite the uptick, arrears remain below the pandemic-era high of 1.86% seen in mid-2020.
APRA’s measure includes both loans overdue by 30 to 89 days and non-performing loans – those that are either more than 90 days past due or where the lender believes full repayment is unlikely without enforcement action.
The Reserve Bank of Australia (RBA) offered further detail in its latest Financial Stability Review, noting that even among higher-risk cohorts – such as borrowers with high loan-to-income (LTI) or high loan-to-value (LVR) ratios – arrears remain generally low. Loans with an LVR of 80% or more peaked at about 2.5% in 2024 but have since fallen, while borrowers with an LTI above four also saw arrears decline from a peak of around 1.5%.
According to Cotality research director Tim Lawless (pictured), several structural factors were helping households stay on top of their repayments despite rising costs.
“Strong prudential standards, tight labour markets, extremely low levels of negative equity, and accrued liquidity buffers have all helped to keep arrears low,” Lawless said.
Data show interest-only loans accounted for 19.7% of new mortgages in the March quarter – well below APRA’s prior 30% cap that was in place between 2017 and 2018. Lending to borrowers with high debt-to-income (DTI) and LTI ratios has also remained subdued, sitting at 5.8% and 3.1% of new originations, respectively. High-LVR lending has stayed below 7% since mid-2022.
One key factor underpinning borrower resilience is the serviceability buffer applied to new loans. Since October 2021, lenders have been required to assess borrowers’ ability to repay loans at interest rates three percentage points above the actual rate. While mortgage rates have climbed more than four points from 2022 lows, this buffer has limited the risk of overextension.
Still, some in the industry argue that lending criteria may now be overly restrictive, limiting access to credit even for borrowers with adequate income and assets.
Lawless said the broader housing market continues to act as a safeguard against a surge in arrears.
“The RBA has theorised that higher mortgage arrears rates would require a ‘double trigger’ – both the inability to repay and the presence of negative equity,” he said. “So far, most borrowers have retained their ability to pay despite higher debt servicing costs, thanks to persistently tight labour market conditions, while instances of negative equity remain rare across the Australian housing market.”
Variable mortgage rates have risen by roughly four percentage points since 2022, lifting monthly repayments by more than $1,500 for a $750,000 loan. Yet, unemployment remains low at 4.1%, with underemployment near long-term lows.
The RBA estimates fewer than 1% of households are currently in negative equity – a key reason distressed borrowers may still be able to sell rather than fall into default.
Another layer of resilience comes from the savings households built up during the pandemic. The household saving ratio stayed above 10% from mid-2020 to early 2022, giving many borrowers a buffer to draw down as costs rose.
Some households have also made lifestyle changes to prioritise repayments. Lawless referenced the now-famous “wagyu and shiraz” analogy, a phrase coined during a court case to illustrate that borrowers can cut discretionary spending when needed: “If I really want my new home, I can make do on much more modest fare.”
Looking ahead, analysts expect arrears to remain contained, especially as mortgage rates begin to fall and cost-of-living pressures ease. Rising home values are also expected to keep the rate of negative equity very low, further reducing default risk.
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