Mortgage arrears jump to new three-year high

New data from CoreLogic revealed mortgage arrears have risen to 1.6 per cent in the March quarter of 2024, in what is the highest reported figure since Q1 2021.

This growing trend was attributed to the increase in arrears of non-performing loans to 0.93 per cent, which are those that are at least 90 days overdue or the lender does not expect to recover the full remaining amount. Non-performing loans arrears are now slightly higher than they were at the beginning of the COVID-19 pandemic (0.92 per cent).

Mortgage holders who are 30 to 89 days overdue on their repayments have now seen their highest level since Q2 2020 at 0.68 per cent, up from 0.35 per cent in Q3 2022.

Total mortgage arrears also saw their lowest level during the COVID-19 pandemic at just 1.0 per cent.

“A key factor in higher mortgage arrears is of course the sharp rise in the cost of debt. With the average variable interest rate on outstanding owner occupier home loans rising from 2.86% in April 2022 to 6.39% in March 2024, a borrower with $750k of debt would be paying nearly $1,600 more each month on their scheduled repayments,” research by Tim Lawless, Research Director at CoreLogic Asia Pacific, 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.

“There is also the fact that households are more sensitive to sharp adjustments in interest rates, given historically high levels of debt, most
of which is housing debt. Loosening labour market conditions would also be playing a role.”

Lawless also noted that some borrowers have managed to stay on track with their mortgage repayments, relying on savings buffed up during the pandemic, working more hours or multiple jobs and contributing less to mortgage offset accounts or redraw facilities. The data indicated that the household savings rate dropped from 24 per cent at the onset of the COVID-19 pandemic to just 0.9 per cent by 2024, the multiple job-holding rate has increased from a 20-year low of five per cent to close to seven per cent in 2024, and scheduled payments now account for approximately 80 per cent of total monthly mortgage payments when compared to approximately 55 per cent in 2021.

“Its likely mortgage arrears will rise further as unemployment lifts, household savings deplete further and, more broadly, economic conditions navigate a period of weakness. However, arrears are unlikely to experience a material ‘blow out’ unless labour markets weaken substantially more than forecast,” Lawless wrote.

“Another factor in low mortgage arrears is likely to be a history of strong underwriting standards from Australian lenders and the prudential regulator, APRA. Borrower serviceability continues to be assessed at a mortgage rate 3.0 percentage points higher than the loan product rate, as has been the case since October 2021 when APRA lifted the serviceability buffer from 2.5 percentage points.”

Lawless also found that while the Australian Prudential Regulation Authority (APRA) assesses borrower serviceability at three percentage points higher than the loan product rate, the majority of borrowers between 2019 and 2022 would have seen their mortgage rate now rise more than three percentage points.

There was also a noticeable trend of more ‘riskier’ types of lending around 2021 and 2022, including loans with a high loan to income ratio, loans with high debt to income ratios and loans that originated with a loan-to-value ratio (LVR) of 90 per cent or more.

“APRA data shows only 3.1% of loans originated in the March quarter had a credit limit greater than or equal to six times the annual income of the borrower, down from 11.1% of originations in the final quarter of 2021,” Lawless wrote.

“High debt to income ratio lending was at a series low in the March quarter, comprising just 5.2% of home loan originations, down from the final quarter of 2021 when 24.3% of new lending was to borrowers with an overall debt level at least six times higher than their gross annual income.”

The number of home loans granted with a deposit of 10 per cent or less have risen slightly from the September 2023 quarter, but still remain at 7.9 per cent for owner occupiers and 3.2 per cent for investors. This is still a significant decrease from the December 2020 quarter high of 14.1 per cent for owner occupiers.

Lawless said data from the Reserve Bank of Australia (RBA) indicated high LVR loans recorded higher mortgage arrears than other categories of lending.