Problem home loans are now at their highest level since the aftermath of the global financial crisis, according to the credit ratings agency Standard and Poor's Global.

Key points: High levels of household debt and underemployment, as well as low wage growth, are leading to rising levels of mortgage arrears

High levels of household debt and underemployment, as well as low wage growth, are leading to rising levels of mortgage arrears Standard and Poor's says interest rate and tax cuts, as well as easing credit conditions, are unlikely to help much

Standard and Poor's says interest rate and tax cuts, as well as easing credit conditions, are unlikely to help much Investor arrears are rising faster than owner-occupier arrears

Concerningly, Standard and Poor's said little relief is in sight.

"Tepid wage growth, high household debt and a softening economy are likely to keep arrears elevated for some time," Standard and Poor's analyst Erin Kitson said.

"Tougher refinancing conditions will continue to hold down prepayment rates by restricting borrowers' ability to self-manage their way out of mortgage stress."

Prepayment rates relate to normal repayments on home loans, unscheduled amounts above normal repayments and refinancing loans.

The report found the Australian residential mortgage-backed securities (RMBS) sector deteriorated in the first quarter of 2019 as debt serviceability pressures mounted.

Unusually, arrears have been rising toward previous highs, despite stable employment conditions and low interest rates.

However, Standard and Poor's said, as long as employment did not deteriorate, the creditworthiness of the RMBS sector was unlikely to be severely affected.

Long-dated arrears of more than 90 days now comprise more than half of all problem loans. ( Supplied: Standard& Poor's Global Ratings )

Policy tweaks unlikely to help

The credit agency's quarterly report on "Australian Home Loan Arrears" found the array of monetary and fiscal policies unleashed in recent weeks may not improve the situation for many stressed borrowers.

S&P Global said that is particularly true for those who had already slipped into the "long-dated", or 90-day-plus, arrears category.

"Longer dated arrears have shown no signs of improvement as borrowers in this category have no where to go in the current lending environment," the report said.

Longer dated arrears now accounted for half the problem loans, compared to less than 40 per cent during the previous recent peak in early-2012, after the GFC's strangulation of credit markets had hit, interest rates had risen and unemployment started to tick up.

"Overall arrears, while going up, they are still low," Ms Kitson said.

"Provided unemployment stays stable, we don't see it as a significant problem, but it is a trend we are watching closely."

Standard and Poor's said positive announcements, such as this week's RBA rate cut, may help sentiment, but it was uncertain how they would, "affect mortgage arrears, particularly those in the more advanced stage, which continue to reach new highs."

Policy issues

Announcement Credit impact APRA to remove 7pc interest rate floor Most households unlikely to significantly increase borrowing capacity Could help low income households & first home buyers borrow closer to maximum limit Expense-verification processes will still affect access to credit Low and middle income tax breaks May provide some short term relief but minimal long term impact on debt serviceability for most borrowers. More rate cuts To the extent it's passed on, it will provide some relief Effect of further rate cuts is likely to be smaller than in the past, given the high level of household debt Proposed first home loan deposit scheme Policy certainty likely to stabilise property market sentiment and vendor confidence in the short term It's less likely to affect arrears performance, which is more sensitive to debt serviceability pressures Policy certainty around proposed property related taxes Policy certainty likely to stabilise property market sentiment and vendor confidence in the short term It's less likely to affect arrears performance, which is more sensitive to debt serviceability pressures

Source: Standard & Poor's Global Ratings

Why are arrears rising

Ms Kitson said there were a number of interesting differences with the previous peak of prime loan arrears in March 2012, with current conditions worse in many areas.

"What was different and where things got worse were household debt was much higher, underemployment [people in work, but looking for more] was also higher and wage growth was lower," Ms Kitson said.

"Those factors are having a big effect."

Arrears factors

Factor affecting arrears March 2012 March 2019 Unemployment rate 5.2pc 5.1pc Underemployment rate 7.6pc 8.6pc Annual wage growth 3.6pc 2.3pc Household indebtedness 159.5pc 189.6pc Standard variable interest rate 7.4pc 5.4pc Prime 30+ days arrears 1.6pc 1.5pc

Source: Standard & Poor's Global Ratings, ABS, RBA

Investors struggling more

Another key trend Standard and Poor's identified was the narrowing gap between investor and owner-occupier arrears.

Traditionally investors have enjoyed a better credit record than owner-occupiers, however the prudential tightening around the investment sector, driving up interest rates and reducing access to interest-only loan rollovers, appears to be taking its toll.

Investors being targeted with higher interest rates after 2016 has seen their arrears rates increase ( Supplied: Standard & Poor's Global Ratings )

Not surprisingly the study found the resource-rich states hit by the mining construction downturn and sharpest house-price falls have significantly higher arrears rates.

Western Australia and the Northern Territory have arrears rates of more than 3 per cent, more than double the national average. Queensland's arrears rate is 1.9 per cent.

Tasmania, the ACT and New South Wales all have the lowest levels of problem loans

The 10 worst performing postcodes

State Suburb Loans in arrears Qld Bungil 8.15pc NT Darwin 6.60pc WA Cloverdale 6.35pc WA Byford 6.25pc Qld Blenheim 5.83pc WA Binduli 5.68pc WA Clarkson 5.48pc WA Maddington 5.32pc SA Bungama 5.32pc Qld Blaxland 5.10pc

Source: Standard & Poor's Global Ratings