Council of Financial Regulators warn more borrowers falling behind on repayments

Homeowners in NSW and Victoria have reported the sharpest uptick in borrower stress with mortgage arrear rates rising as inflation and interest rate hikes take effect.

More Australians are falling behind on mortgage repayments. Picture: NCA NewsWire / Max Mason-Hubers

Australia’s top financial regulators have warned that a growing number of borrowers are falling behind on mortgage payments.

In a statement following its quarterly meeting last week, the Council of Financial Regulators – which includes the Reserve Bank, the Treasury secretary and officials from APRA and ASIC – said the body is monitoring risks to the nation’s financial system from lending to households and businesses, and assessed that it remained contained for now.

High inflation and increased mortgage payments continued to be widely felt across the country, it said, and the share of borrowers falling behind on mortgage payments had risen, as have financial hardship applications, but from a low level.

The Reserve Bank has raised interest rates 13 times between May 2022 and November 2023, bringing the cash rate from 0.1 per cent to 4.35 per cent, and putting pressure on borrowers by increasing their mortgage repayments.

On the average $500,000 loan payments have increased $1210 a month and $2420 on a $1m loan, according to RateCity.com.au.

Data from S&P Global reported NSW and Victoria have reported the sharpest uptick in borrower stress with mortgage arrears at 1 per cent nationally by the end of March, up from 0.95 per cent a year ago.

The council also noted that there had been an increase in insolvencies for both individuals and companies, particularly small and medium sized enterprises, over the previous twelve months as a result of higher interest repayment, cost pressures and weakened demand.

The body is chaired by Reserve Bank Governor Michele Bullock. Picture: NewsWire / Martin Ollman

This followed a period where insolvencies had been well below usual levels reflecting the significant support measures put in place during the pandemic, including those from the ATO.

“The Council noted that some businesses are experiencing challenging conditions due to slowing demand, continued domestic input cost pressures and higher interest expenses. Members agreed on the importance of monitoring trends in insolvencies over the period ahead,” the statement said.

Figures from the Australian Securities & Investments Commission show there have been 8742 insolvency appointments up to April 30 in this financial year, compared with 6200 during the same period a year ago.

The current financial year is shaping up to be the highest rate of external administration and controller appointments since 2011 when 10,757 businesses went under.

The use of new technological applications in the financial system, particularly in relation to the expected increased adoption of artificial intelligence, presented an opportunity for increased productivity for both the financial system and the broader economy, it said.

However, members also discussed the potential for AI to create or amplify risks in the financial system.

“Council agencies agreed to continue their engagement with industry and monitoring of the adoption of AI in the period ahead within their existing regulatory frameworks,” the statement said.

Risks from domestic lending to commercial real estate (CRE) were also discussed at Friday’s meeting. Members observed that these remained contained due to banks’ low exposures, conservative lending practices and the relatively strong financial positions of CRE owners.

Council agencies continued to monitor the challenging conditions in global and Australian CRE markets, particularly given the potential for stress in overseas CRE markets to be transmitted to domestic markets through foreign ownership and common sources of funding.

Progress aimed to enhance the resilience of the Australian financial system in light of a more complex geopolitical environment had continued. Fragmentation in the global economy and financial system had risen and the council had agreed to engage with industry and across government on the importance of financial institutions incorporating geopolitical risk into their wider risk-management frameworks.