Australian Prudential Regulation Authority reveals mortgage arrears are getting worse

The banking regulator has admitted it is concerned about rising unemployment leading to an increase in borrowers falling behind on their mortgage repayments as more first homebuyers entered the market with a small deposit.

With unemployment hitting a five-year of 4.7 per cent in September, the chair of the Australian Prudential Regulation Authority John Lonsdale admitted this was a concern despite home loan arrears still being at low levels.

“We’re closely watching the employment market which would drive a problem in that area,” he told the Senate economics committee on Thursday under questioning from Nationals leader Matt Canavan.

The proportion of borrowers struggling to pay their mortgage is also worsening following four interest rate rises so far this year and a fifth universally expected next week that would take the Reserve Bank cash rate to an 18-year high of 4.85 per cent.

“There are certainly cost-of-living pressures in the community,” Mr Lonsdale said.

“There is certainly mortgage stress in the community but how much of that actually translates into a non-performing loan is something different and what the banks are telling us is that certainly over recent years, customers who are experiencing mortgage stress are going to the banks earlier, they’re talking about possible options, repayment plans are being worked through and there’s a much better triaging of mortgage stress than was once the case.”

Since Labor’s 5 per cent deposit scheme debuted in October last year, the proportion of borrowers getting into the market with a small deposit had also increased, but Mr Londale admitted the data was incomplete.

This means the bank would own a 95 per cent share of the property as this borrower entered the market with a 5 per cent deposit, which the Federal Government guaranteed.

These are known as loan-to-valuation ratios of 95 per cent.

“I think there’s a trend that we’re watching that there is a move, we’ve got more first homebuyers moving into the 90 and 95 per cent category, if that makes sense. They’re moving up in leverage,” Mr Lonsdale said.

Greens senator Barbara Pocock admitted she found that hard to follow.

“I wonder if you could give us that in writing on notice? It’s very hard to absorb verbally but thank you,” she said.

Mr Londale’s deputy Therese McCarthy Hockey confirmed arrears of at least 30 days were getting worse, for all kinds of borrowers.

“They are ticking up and there are elements of some greater indication of hardship coming through,” she said.

“The banks talk to us about that and we see a bit in the data.

“What’s happening is the mortgagee is coming to the bank and they are working with the bank.”

Borrowers are considered to be delinquent if they are 30 days or more behind on their mortgage repayments while the default rate relates to home owners who are 90 days in arrears.

APRA data showed 1.01 per cent of all home loans were in default in June, up from 0.99 per cent in March.