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Mortgage arrears remain stable, supported by strong lending practices, steady employment, and households prioritising repayments amid cost-of-living pressures.
The proportion of mortgage arrears, home loan repayments made after the due date, has remained relatively stable despite a small uptick in the March quarter, according to a new report.
Arrears can include loan payments that are 30–89 days overdue and loans that are 90 days or more overdue, which are considered non-performing.
According to an APRA data analysis by Cotality, mortgage arrears increased slightly from 1.64 per cent in Q4 2024 to 1.68 per cent in Q1 2025.
Despite the slight increase, Cotality’s research director Tim Lawless noted that arrears still remain below the recent high of 1.86 per cent recorded in Q2 2020.
The findings came after the RBA’s latest Financial Stability Review showed a general downward trend in arrears, even among highly leveraged borrowers and lower-income households that tend to have higher arrears rates.
According to the data, mortgage arrears for borrowers with a loan-to-value ratio of 80 per cent or higher that peaked around 2.5 per cent in 2024 are now falling.
Additionally, borrowers with a loan-to-income ratio above four reached about 1.5 per cent and are also trending downwards.
According to Lawless, one of the factors behind the containment of arrears during a time of high interest rates and cost-of-living pressures may be strengthened lending standards.
For example, interest-only lending, which can be considered riskier, comprised 19.7 per cent of loan originations in the March quarter.
“Interest-only lending comprised 19.7 per cent of originations in the March quarter and has consistently held well below the previous temporary limit of 30 per cent set by APRA between 2017 and 2018,” he said.
Additionally, as another factor, high LTI (loan to income) and high DTI (debt to income) loans made up 3.1 per cent and 5.8 per cent of loan originations, respectively, in Q1.
Further, the mortgage serviceability buffer, which was lifted from 2.5 percentage points to 3 percentage points in October 2021, acted as another measure to ensure repayments could be made.
The mortgage serviceability buffer adds 3 percentage points to the current interest rate to determine a borrower’s ability to repay a loan.
“Lifting the buffer from 2.5 percentage points to 3 percentage points in October 2021 has helped to lower the default risk, even though mortgage rates have risen a lot more than 3 percentage points from their 2022 lows,” Lawless said.
Additionally, many borrowers have still been able to make their repayments due to consistently tight labour market conditions and negative equity remaining rare.
In May, unemployment peaked at 4.1 per cent and has remained stable around this level or below since early 2022.
Lawless said the labour market showed that many Australians have gainful employment to make servicing their mortgages possible.
Similarly, underemployment, referring to the number of those seeking to work more hours, hangs at close to multi-decade lows.
Finally, Lawless said households have been able to draw on their pandemic savings amid higher debt servicing costs and cost-of-living pressures.
He said the household saving ratio held above 10 per cent between mid-2020 and early 2022.
Lawless speculated that overall, households would be tightening their belts and pulling back on non-essential items to focus on debt repayments and cost-of-living expenses.
“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 said.
“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,” he concluded.
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