A new report shows a sharp increase in the number of 'low-doc' borrowers struggling to keep up with their mortgage repayments as interest rates rise.

The latest snapshot of the Australian residential mortgage backed security (RMBS) market by Fitch Ratings paints a positive overall picture, with so-called 'prime loans' generally performing well, despite three consecutive rate rises from March to May.

Adjusted for loans that passed from being in arrears to being settled because the property was sold, the percentage of prime loans more than 90 days in arrears increased from 1.33 per cent in the June quarter to 1.37 per cent in the three months to the end of September.

However, Fitch says self-employed borrowers have been hit hard, which has pushed arrears among prime low documentation loans to a record 3.97 per cent - slightly higher than the previous peak of mortgage delinquencies in this segment reached during the peak of the financial crisis in the December quarter of 2008.

This is a category of loans where borrowers meet the usual lending criteria, but are unable to supply sufficient evidence of their regular income, often because they are self-employed or contract workers with fluctuating earnings.

The associate director in Fitch's structured finance team James Zanesi says higher mortgage repayments appear to be hitting the self-employed sector much harder than employees.

"The three consecutive cash rate hikes ending in May 2010 modestly affected Australian prime mortgage performance in the third quarter of 2010. Households have demonstrated some stability in spite of the higher mortgage payments," he said.

"The most vulnerable borrowers, such as low-doc and self-employed borrowers, have experienced the worst performance, with the increase in mortgage payments having an impact on affordability."

The very worst performance in the September quarter continued to be amongst the closest equivalent Australia has to subprime loans -'low-doc, non-conforming' borrowers.

The arrears rate amongst this group was 18.94 per cent, although it makes up a relatively tiny proportion of Australian mortgages.

Fitch says it does not expect any substantial improvement in the level of delinquent mortgages until well into next year, as Christmas spending tends to drive people further behind in their repayments.

The September quarter figures also do not capture the effect of the steep interest rate rises borrowers faced in November, when some banks almost doubled the Reserve Bank's 25 basis point cash rate increase.