Loan woes on the rise

Regulators alarmed as mortgage holders feel squeeze

Regulators are growing increasingly concerned about a jump in home loan hardship for mortgage holders amid worries of the potential for a commercial property lending crisis to spill into local markets.

In the notes of its latest meeting, the Council of Financial Regulators revealed regulators were seeing a “materially” higher lift in hardship applications from households to lenders, from their very low levels during the pandemic.

The CFR, which represents the Reserve Bank of Australia, the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and Treasury, warned that the risks to the financial system from households “warranted ongoing close attention”, but the peak body noted these risks remained “contained for the time being”.

The statement reveals representatives from ASIC, the corporate regulator, discussed observations of borrowers who were seeking financial hardship assistance from their lenders.

ASIC intervened in financial markets last August to warn lenders to lift their hardship application processes.

This was soon followed by its legal action in September against Westpac, taking aim at the bank’s failure to respond to hardship notices.

The CFR noted ASIC said it saw an increase in households falling behind on loan payments, though it pointed out that his came off an ultra low base.

“The council noted that the risks to household balance sheets, and in turn financial stability, would increase if inflation were to remain high for longer than anticipated or if labour market conditions deteriorate more than expected,” the CFR said.

Ratings agencies have charted an increase in home loan arrears, with non-prime borrowers representing selfemployed workers or those with poor credit ratings bearing the brunt of the mortgage market deterioration.

This comes as interest rates have stayed at their highest level in 13 years, after the RBA moved to lift rates to 4.35 per cent in November last year.

The warnings from CFR are a marked increase from the relatively benign statements offered in recent meetings.

In December, the CFR said high household leverages had “potential to pose risks to the financial system and economy”.

APRA, the prudential regulator charged with overseeing banks, copped criticism in 2023 after the regulator maintained its 3 per cent serviceability buffer for lending after the CFR backed in the move.

However, some lenders, including CBA and Westpac, have sliced the buffer down to 1 per cent for borrowers who have not missed payments and have high equity after APRA told lenders they could be reduced in “limited” and “exceptional” circumstances.