Despite the lowest home loan rates in decades, more Australians are falling behind in their repayments.

Key points: Around 1 per cent of Australian mortgage borrowers are at least 90 days behind in their repayments

Around 1 per cent of Australian mortgage borrowers are at least 90 days behind in their repayments Investors are demanding higher returns for lower-rated Australian mortgage-backed securities

Investors are demanding higher returns for lower-rated Australian mortgage-backed securities RBA says Australian arrears are low relative to many comparable countries and unlikely to jump unless unemployment climbs

The head of the Reserve Bank's financial stability department, Jonathan Kearns, broke the news to developers in a speech to the Property Leaders Summit in Canberra.

"The share of banks' housing loans in arrears is now back around the level reached in 2010, the highest it has been for many years," he said.

"But arrears are still well below the level reached in the early 1990s recession."

But they are at the highest level since that recession, as this graph from Mr Kearns's presentation shows:

Australian mortgage arrears are at their highest level since the early 1990s. ( Supplied: RBA )

Mr Kearns was keen to emphasise the positives in the data.

"Another way to look at the arrears rate in Australia is to note that over 99 per cent of housing loans are on, or ahead of, schedule," he said.

"With overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector."

He also pointed out that Australia's level of home loan arrears was well below many other developed economies.

Home loan arrears in Australia are lower than in the UK, Germany or the USA. ( Supplied: RBA )

The figures appear a little less rosy when you look at mortgages that are more than 30 days behind on repayments, as opposed to the RBA figures looking at 90-day-plus arrears.

Figures released by S&P Global Ratings show 30-day arrears rose slightly from 1.51 per cent in March to 1.53 per cent in April — S&P noted that arrears were up 0.17 percentage points on a year earlier.

"Arrears have continued to rise during the past 12 months, albeit from low levels, despite low interest rates and stable employment conditions," S&P observed.

Investors spooked by housing downturn want higher returns

Financial news service Reuters has reported that investors are now receiving up to 40 basis points more than they were last year to buy lower-rated and unrated residential mortgage-backed securities — financial products that institutions use to effectively on-sell home loans, where the investors receive the repayments from borrowers.

The rise in returns that investors are demanding means they now view the loans as riskier than they did a year ago.

However, Reuters reported that demand for less risky mortgage-backed securities remains strong, indicating that investors do not expect loan defaults to become widespread.

S&P said the Reserve Bank's recent 25-basis-point rate cut will help some borrowers, but is more likely to help stop people falling behind on their loans rather than assisting people who are already behind and might struggle to change bank to get a lower rate.

"Recent rate cuts will help with debt serviceability, but we expect it to make more of a difference in the earlier arrears categories," the agency noted.

"Borrowers who are deeper in arrears are more likely to struggle due to the diminished refinancing prospects in the current lending environment."

WA and Queensland are the problem hotspots

With employment seen as being the key for people to keep up with their mortgage repayments, it is not surprising that states and regions with higher unemployment rates have also seen higher mortgage delinquencies.

"While the unemployment rate has declined nationally, this hasn't been the case everywhere," Mr Kearns observed.

"What we can see across Australia is there is a clear pattern of more loans going into arrears in locations where the unemployment rate is higher.

"Notably the unemployment rate has increased and income growth slowed in Western Australia and parts of Queensland with the end of the mining boom. These areas have seen larger increases in arrears."

Both the RBA and S&P have noted an increase in the proportion of property investors falling into arrears — investors have typically had lower arrears rates than owner-occupiers because they are generally more willing to sell if they get into financial difficulties.

However, falling property prices and a lack of buyers have made it harder to sell, and Mr Kearns said falling rents and empty properties have also hurt many investors.

"In Western Australia, where arrears have increased most, rental property vacancy rates have been high, reducing the income of landlords," he observed.

This has been exacerbated for many borrowers, especially investors, by tighter lending requirements over the past few years.

"Some borrowers who may have anticipated being able to roll over an interest-only period are finding they cannot," he noted.

"Some are then facing temporary difficulty servicing the higher principal and interest (P&I) payments at the end of the interest-only period.

"However, most borrowers in this position get their repayments back on track within a year."

Newer loans have lower arrears rates

However, Mr Kearns said there is already evidence that improved lending standards will have longer-term benefits.

"Using the Reserve Bank's Securitisation Dataset we find evidence consistent with more recent cohorts of loans having lower arrears rates than earlier cohorts," he said.

"Specifically, those loans originated in the past few years have an arrears rate that is up to one-quarter of a percentage point lower than loans originated prior to 2014."

Home loan arrears are higher for loans from 2011 and 2012 than more recent years. ( Supplied: RBA )

Mr Kearns said tighter lending standards would take a while to feed through into lower rates of mortgage arrears more generally.

"A three-year-old loan is four times more likely to go into arrears than a one-year-old loan," he added.

But Mr Kearns cautioned against tightening lending standards too far, saying that if no borrowers were defaulting that would mean standards were too restrictive.

"If the arrears rate was persistently very low, that would suggest that lenders were being too cautious in lending," he argued.

"In that world, some people who could almost certainly repay a loan would struggle to get one."