Key implication: Mortgage stress is moderating in percentage terms, but the system is carrying more borrowers at risk in absolute terms. That combination points to a stabilising credit outlook for lenders, a cautious consumption outlook for retailers, and a competitive reshuffle in mortgage distribution where repricing beats refinancing.

The numbers behind the narrative

Roy Morgan’s latest analysis shows the share of mortgage holders deemed ‘at risk’ has fallen to its lowest point since early 2023, easing for the fourth straight month after more than two years of rate increases. The nuance: while the proportion is down, Roy Morgan also reports the number of Australians at risk has increased by over 500,000 as the population and mortgage holder cohort expanded.

This duality aligns with broader financial conditions. The Reserve Bank’s November 2024 Statement on Monetary Policy flagged a benign credit outlook, with non-financial corporate bond spreads near their lowest since early 2022 — a signal that markets are pricing limited deterioration in credit. Housing prices have risen steadily since early 2023, supporting equity buffers, while Jobs and Skills Australia noted the average mortgage rate on new loans rose into March 2024, implying new entrants still face higher servicing costs than pre-tightening.

Business impact: margins, arrears and wallet share

For banks, easing stress share should cap near-term arrears growth and contain credit impairment charges. However, the retention battle is compressing margins. Industry platform Sherlok indicated in April 2024 that repricing volumes are expected to outpace refinancing, reflecting a shift from churn to internal price competition. Expect net interest margin (NIM) pressure as incumbents selectively cut rates for at-risk or rate-sensitive cohorts to prevent runoff.

Brokers face a flatter refinance market and must pivot to annual ‘health checks’, repricing advocacy and product optimisation to defend trail commissions. Non-bank lenders, with higher funding costs and less deposit optionality, are most exposed to selective bank repricing that cherry-picks prime customers.

Retailers and utilities get limited relief. A smaller at-risk share cushions the worst-case demand shock, but the increased number of stressed households keeps discretionary spend subdued. The State of the Housing System 2025 highlights that rental stress affected more than half of lower-income renters in 2023 — a reminder that broader household cashflow pressures, not just mortgage dynamics, will temper consumption recovery.

Competitive advantage: precision retention and proactive hardship

Australia’s AI landscape still shows a commercialisation gap, with the National AI Centre and subsequent reports noting adoption-heavy, innovation-light patterns through 2024. That gap is opportunity. Early-mover lenders deploying AI-driven retention and risk triage can convert macro stability into market share and lower loss rates:

• Dynamic repricing engines: Micro-segment customers by elasticity (rate sensitivity), risk (probability of default/roll rates) and lifetime value to determine the minimum viable discount to retain — without over-cutting on price.
• Early hardship detection: Use transactional signals (missed utilities, BNPL exposures, wage variability) to trigger outreach and tailored restructures before 30+ day arrears. Responsible AI guardrails matter; the ATO’s work on AI governance underscores the need for transparent model usage and auditability in public institutions — a useful benchmark for financial services.
• Broker enablement: Provide brokers with instant repricing quotes, retention incentives and first-party analytics to pre-empt churn. Sherlok’s repricing trend suggests distribution advantage will accrue to lenders who treat brokers as co-managed retention partners, not just acquisition channels.

Market context: supply constraints limit the upside

Structural housing supply challenges remain a governor on broad-based relief. A late-2024 review of NSW housing supply found tougher economics for new builds and a decline in completions, while national data through 2024 showed higher new-loan rates, lifting entry barriers. With prices rising since early 2023, new borrowers face higher leverage and debt-servicing loads than incumbents who locked in earlier. This creates a two-speed household sector: improving resilience among established borrowers, and elevated vulnerability for recent entrants.

Policy still matters. APRA’s 3 percentage point serviceability buffer — retained through the tightening cycle — has bolstered lender portfolios against shocks. But supply-side reforms, rather than financial buffers alone, will determine the durability of mortgage stress relief if rates drift lower in 2025–26.

Technical deep dive: what the risk models are seeing

Credit teams should focus on the pipeline of stress, not just the stock. Key leading indicators:

• Roll rates: 1–29 days past due to 30–59 days. A downtrend confirms the share-of-stress moderation; any uptick is an early-warning flare.
• Loss-given-default (LGD): Rising dwelling prices and low distressed listings support lower LGDs; watch for segments with thin equity (recent FHBs).
• Serviceability headroom: Estimate borrower buffers versus prevailing rates; track fixed-to-variable reset cohorts and income growth offset.
• Funding costs: With corporate spreads near lows (RBA), wholesale funding is supportive, yet deposit competition remains intense. Repricing victories come at the cost of NIM unless offset by lower churn and better cross-sell.

Scenario planning: In a ‘soft-landing’ case with gradual RBA easing, arrears peak lower and retention-led margin compression becomes the dominant theme. In a ‘sticky inflation’ case, rates stay higher for longer, reigniting stress among thin-buffer cohorts and raising impairment risk for non-banks.

Execution reality: playbooks for 2025

• Lenders: Stand up a pricing lab combining risk, product and data science; target weekly sprints to test elasticity by segment. Tie hardship automation to human-in-the-loop reviews to meet conduct expectations. Align broker remuneration with retention outcomes.
• Brokers: Industrialise annual customer reviews, prioritising cohorts flagged by lenders for proactive repricing. Use consented data to evidence savings and reduce friction.
• Retail, utilities and telcos: Layer mortgage stress indices into customer propensity models. Offer phased payment plans for at-risk segments to preserve lifetime value at minimal cost.
• Policymakers: Keep the serviceability buffer under review as rates move; accelerate supply-side measures to prevent renewed stress among new entrants and renters.
• Investors: Watch 30–89 day arrears, internal repricing volumes vs external refinancing, and NIM guidance. Favour lenders with disciplined price discrimination and robust deposit franchises.

Bottom line: The share of stressed mortgage holders is easing, but the system remains numerically heavy with at-risk households. Early adopters of precision repricing and proactive hardship management will defend margin, keep customers, and exit this phase stronger than they entered.