Mortgage holders are coping, but the pressure is building

Higher interest rates are putting more pressure on mortgage holders, but for now that pressure is not translating into widespread mortgage distress. The latest APRA data show most borrowers are still meeting their repayments. What is changing is the way some borrowers are managing their loans.

The clearest sign is the rise in interest-only lending. In the June quarter, interest-only loans accounted for 23.5 per cent of new housing lending, up from 20.5 per cent at the end of 2024 and 19.9 per cent in March 2025. It is now at its highest level since the current APRA series began in 2019.

Investors are the biggest users of interest-only loans, which is not particularly surprising. The more interesting shift is what is happening among owner-occupiers. Outstanding owner-occupied interest-only lending has risen from $45.8 billion in June last year to $51.5 billion now, an increase of around 13 per cent. That is the highest level since December 2021, when it was $52.2 billion. Owner-occupier interest-only lending then fell steadily, reaching a low of around $44.5 billion in early 2024, before beginning to rise again.

For an owner-occupier, moving to interest-only repayments reduces the immediate monthly repayment because they stop paying down principal. The recent increase suggests more households are looking for ways to manage cash flow as mortgage rates remain high.

We are also seeing banks make greater use of exceptions to their standard serviceability policies. These accounted for 5.8 per cent of new lending in the June quarter, up from 5.1 per cent in March and 4.6 per cent at the end of 2024. This is the highest proportion since the current APRA series began in March 2019. Until late 2023, serviceability exceptions had generally accounted for between 2 and 3 per cent of new lending. They then moved above 4 per cent and have continued to rise.

These exceptions do not necessarily mean borrowers cannot afford their loans. They can include refinancing situations where someone has a strong repayment history but no longer passes a lender's standard serviceability assessment because interest rates are higher. Nevertheless, the increase suggests more borrowers are needing flexibility.

The more traditional measures of mortgage stress remain relatively benign. Non-performing housing loans were 1.01 per cent of outstanding housing credit in June. That is slightly higher than 0.99 per cent in March, but below the 1.07 per cent recorded a year earlier. There is no sign in these numbers of a sharp deterioration in borrowers' ability to meet repayments.

Mortgage buffers also remain substantial. Offset account balances totalled around $340 billion in June, equivalent to 13.3 per cent of outstanding housing credit. That proportion has come back from 13.9 per cent in December and March, but remains well above the levels seen earlier this decade.