Why people who borrowed $1 million-plus are more likely to fall behind

Home borrowers who took out supersized home loans and were hit with successive interest rate hikes over recent years are falling into arrears at a greater rate than those with comparatively smaller or older loans.

For mortgages over $1 million, 0.4 per cent of these were in late-stage arrears, or more than 90 days past due, at the end of June, according to credit data company Equifax. This is up from 0.29 per cent at the same time in 2024.

Depending on when the loans were initiated, borrowers may have enjoyed interest rate cuts in February and May. But they may also have experienced 13 hikes, from rock-bottom levels during the pandemic, substantially increasing repayments over time.

This comes as the Reserve Bank on Tuesday cut the cash rate by 25 basis points, its third cut this year, to 3.6 per cent – its lowest in more than two years. This could provide some relief in the form of lower mortgage repayments, but may also push up house prices, experts say.

Kevin James, chief solutions officer at Equifax, said larger home loans were “more challenged.” The data covers almost all owner-occupier and investor loans taken out in Australia.

“Mortgages, in general, arrears are going up a bit, but certainly those that are a million-plus are the ones that we are actually seeing are pulling away from the others,” he said.

While 90-plus day arrears for smaller home loans also rose over the year to June, they haven’t grown as much as larger loans. For those loans classed as small by Equifax, less than $750,000, 90-plus day arrears rose from 0.34 per cent to 0.38 per cent over the year to June.

Arrears for medium-sized loans, of $750,000 to $999,000, jumped from 0.26 per cent to 0.34 per cent for the same period.

The RBA’s latest Financial Stability Review found the “vast majority” of borrowers are on schedule, but highly leveraged borrowers were “significantly more likely to fall into arrears, and a higher share of these borrowers are currently in arrears compared with the pre-pandemic period.”

Mortgage brokers say to be approved for a loan of $1 million or over, a buyer would be likely to need a household income of about $250,000, depending on circumstances. PRD Real Estate chief economist Dr Diaswati Mardiasmo said $1 million loans were becoming more of “the norm,” particularly in cities like Sydney with its median house price above $1.7 million.

Erin Kitson, a director at S&P Global Ratings, speaking generally about arrears trends, said debt to income levels can often be a forward indicator of where arrears pressures may appear, alongside having savings buffers or other income streams, with investors often having a better ability to repay than recent owner-occupiers.

“If people are coming in at a very high point in the property market where interest rates are still quite high and you’ve had to take on a lot of debt, relative to your income, to service that, that’s going to make you more predisposed to arrears,” she said.

Atelier Wealth managing director Aaron Christie-David said job loss could have an impact, particularly among high-income earners.

“Their biggest concern is losing a job and being able to manage their mortgage,” he said.

“They’ve got kids in private schools, they’ve got leased vehicles, for example … It makes it very hard to roll back their lifestyle when they’ve committed to a certain way of living.”

The time of borrowing may also affect the potential for late-stage arrears, particularly for those who bought pre-rate hikes.

“It’s not just the size of the loan,” said Mardiasmo. “Because, depending on the timeline, that will really impact what your monthly mortgage repayments are.”

Across the mortgages valued at $1 million-plus reviewed by Equifax, some that were taken out in the last half of 2022, when rates were lower and affordability was higher, were more challenged now compared to older loans, James said.

“Over a period of time, rates have gone up, potentially savings have started to dwindle a bit,” he noted.

Anthony Landahl, managing director and mortgage broker at Equilibria Finance, said some who borrowed in recent years may have eaten into their cash buffers, due to the rate hikes.

“While those rising rates are now coming down, monthly repayments through that period of rising rates for some borrowers with large mortgages were going up by a few thousand per month, which is a massive impact,” he said.

Repayments also spiked for households who rolled off fixed rates to variable.

“A lot of our clients and a lot of people came off those two- and three-year very low fixed rates over the last 12 months, and for those with a higher loan, in some cases repayments were going up three or four thousand dollars a month,” Landahl said.