Insights 
VT 
Fitch Ratings has observed an unusually sharp seasonal increase in Australian mortgage arrears in the first quarter of 2025. This is due to ongoing cost-of-living pressures and high interest rates impacting household finances.
Conforming mortgage arrears (those overdue by 30+ days) increased by 23 basis points to 1.36%. Non-conforming arrears rose by 39 basis points to 5.32%. This is almost three times the typical seasonal rise of around 8 basis points in the first quarter.
Impact Of Interest Rates And Inflation
The cumulative effect of prolonged high interest rates and persistent inflation has contributed to this surge. Recent rate cuts by the RBA in February and May may ease future mortgage performance, although these changes were not reflected in the first quarter data.
Additionally, housing prices have bounced back with a 0.9% quarterly increase following a decline in the last quarter of 2024. Fitch forecasts further price increases in 2025, aided by limited housing supply, reduced interest rates, and robust migration.
To contain potential losses from mortgage defaults, Fitch Ratings has revised Australia’s outlook to negative from stable but has maintained its current rating.
This recent data paints a clear picture. Mortgage arrears in Australia have accelerated beyond seasonal expectations, and by a wide margin. Typically, we’d expect some rise at the beginning of the year – post-holiday spending and a return to regular financial commitments can strain household budgets temporarily. But what’s been recorded here suggests that temporary pressures have given way to more persistent structural stress.
Arrears on standard loans have jumped sharply. That’s not usual. And loans already categorised as riskier are showing even more discomfort, which isn’t surprising considering their borrowers may have less flexibility when rates remain elevated for longer. When interest rates stay high, even in a neutral market, we can expect some cracks. But when paired with inflation that refuses to retreat meaningfully, pressure builds. The first signs of that pressure appear now in this data.
Interpreting Housing Price Increases
What’s notable is that these arrears rose even before recent rate reductions could be expected to have much influence. Cash rate reductions in February and May may have laid the groundwork for some borrower relief. But monetary policy works slowly. We’re not likely to see the full ripple effects until well into the second half of the year. Until that point, financial stress is still advancing.
There’s also a pick-up in housing prices—up again after a short-lived stumble. When prices rise, this can offer flexibility to those struggling with repayments. A borrower with equity in their property is less likely to default if they have the option to sell or refinance. The challenge, however, sits in timing. Equity support may not move quickly enough to help households already falling behind. And since prices are climbing in part due to tight supply, not broad-based demand, this isn’t a panacea.
The credit ratings world is taking notice. The shift from a stable to a negative outlook sends a message. While the current rating holds for now, the underlying support for that assessment is weakening. High arrears and rate-sensitive borrowers can’t be ignored. If conditions deteriorate further, the pressure to reassess will only grow.
Now, when analysing this from our standpoint, there’s a very clear consequence. Risk pricing must adjust to reflect delinquencies that are not just seasonal noise. Credit performance is changing. If we were still marking models on last year’s assumptions, there’s a risk the data would misstate true exposure. We must account for borrower stress persisting longer than first assumed, especially in asset pools with lower resilience.
Volatility tied to interest rate bets will remain elevated, particularly as markets attempt to anticipate the timing and scope of further monetary easing. Even modest downward moves in policy rates may not swiftly improve arrears. Borrowers respond over time, not all at once. Meanwhile, cost-of-living factors such as rent, utilities, and food remain stubbornly high. These reduce the discretionary budget cushion households rely on to stay current.
For instruments linked to mortgage performance, trailing indicators are no longer reliable as sole guides. Forward-looking metrics, such as wage growth trends and unemployment expectations, must take greater priority now, particularly in hedging adjustments and duration risk. The same applies to interest rate curves that are flattening based on optimism that remains, for now, unproven.
Additionally, shorter-term housing price gains may lead some models to underestimate near-term default probabilities. A thin layer of price growth is not the same as robust consumer confidence. Especially when driven by stock scarcity and migration, these price rises offer little reassurance if borrowers are still struggling with repayments.
In our position, it would be unwise to rely on historical patterns repeating neatly. Risk buffers and stress-tests need active recalibration. We might consider volatility around arrears as sticky through midyear until clearer signs of disposable income recovery appear – and they haven’t yet.
When decision-making relies on assumptions about borrower behaviour, it becomes necessary to front-load caution. Models that underestimate a shift from liquidity strain to actual loan deterioration risk lagging outcomes.
