Credit rating agency flags rising debt serviceability pressures and property price declines as key risks to mortgage performance
Falling property prices, higher unemployment and sustained elevated interest rates are collectively straining Australian mortgage borrowers, according to S&P Global Ratings' RMBS Performance Watch: Australia for the second quarter of 2026.
The report finds that the combination of these factors is depleting the financial buffers of more vulnerable borrowers within the country's residential mortgage-backed securities (RMBS) market, increasing its sensitivity to further macroeconomic deterioration.
Australian prime RMBS loans more than 30 days in arrears (%)
Prime data SPIN shown excludes noncapital market issuance transactions. Prime RMBS arrears exclude noncapital market issuance transactions. Standard variable rates are based on outstanding mortgages. RMBS – Residential mortgage-backed securities. Sources: Reserve Bank of Australia, S&P Global Ratings.
Despite this, the credit rating agency expects overall mortgage performance to remain steady. Prime RMBS arrears stood at 0.85% for loans more than 30 days past due as at June 2026, while nonconforming arrears reached 3.42% over the same period.
Unemployment the key indicator
"Unemployment remains the most significant leading indicator for household consumer finances, including residential mortgages," said Erin Kitson (pictured right), director of structured finance at S&P Global Ratings. "While current unemployment levels will not trigger a systemic rise in arrears, the trend in labor market tightness is a key metric.
"Any sustained increase in unemployment could diminish household disposable income, thereby increasing the risk of payment delinquency, particularly for highly leveraged borrowers and those with weaker credit profiles."
S&P forecasts Australia's unemployment rate to average 4.3% in 2026 and 4.5% in 2027, characterising the credit quality effect of this trajectory as neutral.
Property prices and equity erosion
The S&P report highlights a well-established inverse relationship between property prices and arrears. As home equity shrinks, borrowers have fewer options to refinance or sell voluntarily to resolve financial stress.
Annual changes in property prices vs. arrears
Sources: Australian Bureau of Statistics, S&P Global Ratings.
"The erosion of property values will also narrow the window for voluntary debt management for some borrowers," Kitson said. "As equity cushions diminish, borrowers lose the ability to refinance or sell assets to resolve financial stress.
"We expect this lack of liquidity to extend the duration of arrears, particularly for recent entrants to the market who lack significant equity buildup and robust savings buffers."
The report notes that recently originated, highly leveraged borrowers are most at risk if loans were written at market peaks. However, overall exposure to high loan-to-value (LTV) loans across both the RMBS and authorised deposit-taking institution sectors remains limited, which S&P expects will keep losses contained.
State-by-state picture
Victoria recorded the highest prime arrears among all states at 1% as at June 2026, driven by a comparatively higher unemployment rate and weaker property market performance.
The Australian Capital Territory followed at 0.98%, with New South Wales at 0.91%. Queensland had the lowest arrears among the larger states at 0.55%.
S&P expects arrears to increase across all states and territories as interest rate rises take further effect, with New South Wales and Victoria likely to see more pronounced increases given anticipated slowdowns in investor lending and resulting pressure on property prices.
Prepayments rise, nonconforming risks persist
Prime prepayment rates rose to 21.88% in Q2 2026 from 20.24% in the prior quarter, while nonconforming prepayment rates increased to 30.67% from 29.80%. The report attributes the seasonal uplift partly to end-of-financial-year transactions.
Refinancing activity remains active among prime borrowers as competition for higher-quality credit persists. However, the report cautions that nonconforming borrowers may face increasing difficulty refinancing given elevated rates and slowing property price growth.
Ratings outlook stable
S&P describes the ratings outlook for Australian RMBS as stable with a positive bias. Senior tranches are benefitting from credit support built up through strong prepayment rates, and structural features in many transactions are providing additional ratings stability.
The Reserve Bank of Australia is expected to hold rates through early 2027 before resuming cuts, bringing the policy rate to 3.60% by year-end 2027. S&P characterises the effect of the eventual rate reduction on credit quality as neutral, noting that arrears increases should remain modest provided unemployment stays low.
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