Older home loans are driving mortgage arrears to their highest level in around a decade, with the Reserve Bank arguing tighter lending standards over the past few years have newer loans in good shape.
Speaking at a financial services gathering in Sydney, the Reserve Bank's deputy governor Guy Debelle said the level of borrowers behind on their mortgage repayments was at decade highs and "warrants some scrutiny", but was not yet a cause for concern.
"The mortgage arrears rate, at 1 per cent, is low by both historical and international standards. Arrears in the US peaked at around 10 per cent in the financial crisis," he observed.
"Non-performing loans currently pose little risk to the health of financial institutions. This is not surprising in an environment where the unemployment rate is low and interest rates have been declining."
Dr Debelle argued one of the reasons why the Reserve Bank was not overly worried about the rising number of people falling behind on their loans was that tighter lending standards over the past five years appeared to have reduced arrears among recent borrowers.
"When we control for the age of loans and the state of the economy, we find that the more recent cohorts have lower arrears rates than earlier cohorts," he said.
"Specifically, those loans originated in the past two years have an arrears rate that is almost 40 basis points lower than loans originated prior to 2014."
Those older mortgages are showing up as rising arrears on most of the major banks' books, as revealed during their recent profit reports.
Banks becoming more patient with arrears, Debelle says
With home prices having fallen in many regions over the past couple of years, Dr Debelle said a factor in the rising arrears rate was banks allowing borrowers longer to get back on top of their repayments, rather than repossessing and possibly selling the property at a loss.
"Liaison with banks suggests that more lenient forbearance and foreclosure policies have also contributed to the increase in longer-term arrears rates," he added.
However, Dr Debelle cited Western Australia's rise in mortgage arrears rate from 0.7 per cent of loans to 1.8 per cent, during its economic downturn after the mining construction boom peaked, as an example of what could happen across the whole country if the national economy weakened further.
"The experience in Western Australia provides an insight as to how housing lending in the rest of the country may perform if there was an economic downturn," he said.
"An economic downturn is definitely not our forecast. Rather, it seems unlikely that the national arrears rate will increase substantially from here."