Report by Moody’s Ratings predicts a modest rise in mortgage arrears amid pressure from rates and inflation

About one in 25 sub-prime borrowers were behind on their mortgage at the end of June, after taking hits from rising interest rates and cost of living pain. Arrears are surging from a very low level during the pandemic when the official interest rate was at an emergency setting of 0.1 per cent. The lift is seen as a return to the long term trend, however. Moody’s Ratings calculates 4.2 per cent of subprime borrowers are 30 days or more behind on their bill, based on data from Australia’s huge mortgage resale market. That’s up 1 percentage point over 12 months. Subprime borrowers include Australians with adverse credit histories. Prime borrowers are faring better with an arrears rate of 1.73 per cent. The high-profile investor service said delinquencies had lifted in the June quarter and would climb moderately for the rest of 2024 as “high interest rates and sticky inflation put financial stress on households”. “After rising steadily for the last two years from a historically-low base, delinquency rates are now back up around long-term average levels,” the firm said in a briefing note this week. “We expect high interest rates and cost-of-living pressures will continue to weigh on households over the rest of this year, pushing mortgage delinquencies higher.” But a strong jobs market, rising house prices and household earnings growth will mean that lift is only modest, Moody’s expects. The Reserve Bank is keeping a close eye on how higher interest rates impact financially vulnerable borrowers and so far has expressed confidence the jobs boom will keep the pressure down. Separately, Bloomberg data shows arrears have been surging among borrowers with the highest loan-to-valuation ratios — with mortgages worth more than 80 per cent of the home’s price. Nearly 7 per cent of that group have fallen behind, up dramatically from a low of 2.5 per cent in late 2022. Victoria and Tasmania have the most borrowers in arrears, Bloomberg’s data shows.