Australia’s mortgage market added $181.4 billion in new funding during the March quarter, an 18 per cent lift on the same period last year, even as personal loan hardship climbed to 2.1 per cent and delinquencies on unsecured lending hit 3.6 per cent in May. The gap between secured and unsecured credit performance is the widest it has been in two years, and it raises a straightforward question: are households consolidating debt into mortgages, or is something else at work?
New home loan accounts rose year on year across March, April and May. Average loan size for owner-occupiers held at $735,000 nationally, up 11.4 per cent on the prior year. At the same time, unemployment sat at 4.4 per cent in June, underemployment climbed to 6.5 per cent (the highest in nearly two years), and youth unemployment reached 10.7 per cent. Credit growth is running ahead of labour market strength.
Why housing credit is accelerating
Three dynamics explain the upward trajectory in mortgage funding. First, borrowers with equity and stable income are refinancing to lower rates or consolidating higher-cost debt. Personal loans carry interest rates well above mortgage pricing, so folding that debt into a home loan cuts monthly outgoings and reduces arrears risk on the unsecured side.
Second, investor activity is picking up despite the removal of negative gearing deductions for new purchases in some portfolios. Prices in Perth and Brisbane are still climbing (national dwelling values are up 6.1 per cent year on year despite a 0.6 per cent fall in June), and investors with cash deposits or cross-collateral capacity are locking in yields before the next rate move.
Third, this is partly a timing artefact. The March quarter captured loan settlements that were approved late last year when consumer sentiment was weaker but credit standards were marginally looser. Approvals lag settlements by 60 to 90 days, so funding volumes reflect decisions made before the recent productivity warnings from the RBA began to weigh on sentiment.
What the arrears split reveals
Mortgage arrears remain contained. Personal loan delinquencies, by contrast, jumped in April and May, reaching 3.6 per cent, well above the seasonal peaks of previous years. Credit card delinquencies have also drifted higher, now sitting four basis points above the end of the first quarter.
The divergence tells you two things. Borrowers prioritise secured debt because the consequence of default is loss of the home, so mortgage repayments get paid first. Unsecured debt sits lower in the hierarchy, and when cash is tight, personal loans and credit cards are the first to slip.
It also suggests household balance sheets are under more pressure than top-line mortgage data implies. If a borrower is current on the mortgage but 90 days behind on a personal loan, the mortgage book looks healthy but the household is not. Lenders see this in serviceability assessments: applicants with clean mortgage histories but mounting unsecured commitments that compress borrowing capacity.
Callout: The catch
Rising mortgage funding does not mean households are cashed up. It often means they are moving debt around. A refinance that consolidates $30,000 in personal loans into a mortgage shows up as new housing credit, but the household’s total debt has not changed and the repayment term has just stretched by 25 years. The monthly cashflow improves, but the long-run cost increases.
The role of Buy Now, Pay Later
BNPL spend has climbed sharply over the past six months, even after regulatory changes requiring credit checks took effect last year. Consumers with no recent credit activity accounted for 35 per cent of BNPL enquiries, compared with just 13 per cent for credit cards. BNPL is functioning as an entry point into the credit system, particularly for younger borrowers or those re-engaging after a period of no borrowing.
This matters because BNPL users often move into other credit products within 12 to 18 months. If that transition happens while personal loan arrears are elevated and discretionary spending is up 7 per cent year on year (as it was in May), the risk is that new credit gets layered onto balance sheets that are already stretched.
Scenarios over the next six months
Base case: mortgage funding moderates as the lagged effect of higher underemployment flows through to credit appetite. Personal loan arrears stabilise if discretionary spending pulls back and households prioritise debt reduction. National dwelling prices drift sideways, with Perth and Brisbane holding up and Sydney and Melbourne softening further.
Upside: the RBA cuts rates by 25 basis points before year-end, serviceability improves, and mortgage funding lifts again. Personal loan arrears fall as refinancing activity accelerates and unsecured debt is folded into cheaper home loans. Prices in the stronger markets extend gains.
Downside: underemployment climbs above 7 per cent, discretionary spending reverses, and personal loan delinquencies spill into mortgage arrears as households exhaust their options. Forced sales increase in the outer suburbs of Sydney and Melbourne, where mortgage stress is already elevated. Downsizing activity remains stalled, limiting the supply response.
What to watch
Track the gap between mortgage and personal loan delinquencies. If personal loan arrears keep climbing while mortgage arrears stay flat, households are deferring the problem, not solving it. Watch underemployment more than the headline unemployment rate, because underemployment hits repayment capacity before job losses show up in the data. And monitor refinancing volumes: a surge in refinance approvals with rising average loan sizes suggests debt consolidation is accelerating, which is a warning sign, not a strength signal.
If you are assessing serviceability for a new purchase or refinance, ask your broker for a stress test at 7.5 per cent, not just the floor rate, and pressure-test the result against your unsecured commitments. A clean mortgage history is necessary but not sufficient.
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General info, not financial advice.
