S &P Global Ratings produced a report on Tuesday showing Australian prime home loan arrears rose in April.

The Standard & Poor's Performance Index (SPIN) for Australian prime mortgages, rose to 1.53 per cent in April from 1.51 per cent a month earlier. Arrears in April were up 17 basis points year on year.

However the RBA notes that arrears are still well below the level reached in the early 1990s recession.

Mr Kearns pointed to how loose lending standards several years ago and now more tighter lending standards from Australian Prudential Regulation Authority and Australian Securities and Investments Commission had both had an effect on arrears.

"With weaker lending standards, more loans will be made to borrowers who are likely to experience difficulty repaying their loan, say because their income is less stable. For these reasons, weaker lending standards can lead to higher rates of arrears."

"However measures taken to improve lending standards may actually temporarily increase arrears rates."

Mr Kearns points to interest-only loans where banks have continued to charge higher interest rates and more carefully scrutinise their suitability for borrowers.


"As a result, some borrowers who may have anticipated being able to roll over an interest-only period are finding they cannot."

"If they can’t refinance and struggle to make their existing repayments, they are more likely to fall into arrears."

Mr Kearns also noted that there was a clear pattern between rising arrears and rising unemployment and/or falling income, noting that the unemployment rate has increased and income growth slowed in Western Australia and Queensland - two states where there has been larger increases in arrears.

Who becomes unemployed and for how long are key determinants behind the level of arrears.

Those aged in their thirties and forties are more likely to have a mortgage so if more of them become unemployed, arrears rates will rise compared to those who are less likely to have a mortgage.

Furthermore, if the length of unemployment becomes extended home owners' equity buffers can be eroded. The RBA notes that around two-thirds of borrowers have accumulated buffers of prepayments of their mortgage.

Mr Kearns notes that falling incomes could also tip arrears. "Even small income falls or an unexpected increase in expenditure can put borrowers into arrears," he said.


He notes that such things as the loss of rental income from tenants vacating an investment property could trigger arrears.

"Over the past five years, nominal income growth has been around half its longer-run average. So, rising income hasn’t been able to compensate for other factors that might cause households to struggle to make their mortgage repayments."

On Monday ratings agency Moody's Investors Service noted in a report that delinquency rates on Australian residential mortgage backed securities rose slightly over the three months to March 31 and that they would continue to increase over the coming quarters.

It noted the 30+ day delinquency rate for prime residential mortgage backed securities increased slightly to 1.58 per cent in March from 1.54 per cent in December.