NAB put more home loan customers on its internal early-warning list in the third quarter of 2026, even as official non-performing loan figures improved. The gap between those two metrics, watch loans rising, arrears falling, points to mortgage stress building in the performing book before it shows up in public data.
Applications for new home loans at NAB dropped 15% quarter-on-quarter, reflecting three RBA rate hikes this year and the hold at 4.35% in May. The bank attributed the application decline to rate pressure, Middle East conflict spillovers, and recent federal budget tax changes.
What watch loans measure
Watch loans are customers still making repayments but showing early strain, missed direct debits, overdrawn accounts, reduced savings buffers, requests for hardship variations. They sit in the performing book, not the arrears column, so they don’t appear in headline non-performing exposure ratios.
NAB’s non-performing exposures actually improved 2 basis points to 1.5% of gross loans in the quarter, driven by better business lending outcomes in Australia and New Zealand. But collective provision charges, the money set aside for future losses in the performing book, rose to $119 million, explicitly tied to deterioration in asset quality among borrowers still current on payments.
That’s the tell: the bank is setting aside more for losses that haven’t happened yet, in a book where official stress metrics are flat or improving.
The lag between early signals and actual defaults
Mortgage stress doesn’t announce itself in 90-day arrears data until months after the pressure starts. Borrowers draw down savings, shift to interest-only, consolidate other debts, or rely on offset buffers before missing a mortgage payment.
Watch loans capture that earlier phase. An expanding watchlist suggests the pipeline of future arrears is filling, even if the exit valve, actual defaults, hasn’t opened yet.
NAB holds almost $2 billion in forward-looking provisions and a collective provision ratio of 1.36% of credit risk-weighted assets, indicating the bank is pricing in stress that hasn’t materialised in the backward-looking arrears figures.
The question for borrowers and investors: are other majors seeing the same pattern, or is this specific to NAB’s book?
Key numbers
- NAB home loan applications down 15% quarter-on-quarter
- Non-performing exposures improved to 1.5%, down 2 basis points
- Collective provisions rose to $119 million, driven by performing book deterioration
- NAB holds $2 billion in forward-looking provisions
- Proprietary channel share rose to 50.9% of drawdowns, brokers now under half
Proprietary lending now the majority
NAB’s proprietary channels, branches and direct bankers, accounted for 50.9% of home loan drawdowns in the third quarter, up from 47.7% in the first half. Brokers now originate less than half of new NAB mortgages for the first time in this cycle.
The shift follows a hiring push in direct lending and the wind-down of Advantedge, NAB’s white-label product sold through broker networks. The bank is exiting lower-margin white-label mortgages and pulling volume back to higher-margin proprietary channels.
That mix shift matters for two reasons. First, it reduces broker visibility into NAB’s lending standards, what’s tightening, where serviceability is binding, which postcodes are seeing application declines. Second, it concentrates risk assessment inside NAB’s own credit teams, with less distributed origination scrutiny.
Overall home lending grew in line with system once Advantedge wind-down is excluded, so NAB isn’t losing share. But the channel rebalancing changes how stress signals flow through the market.
Which borrowers hit strain first
The most likely candidates for NAB’s expanding watchlist: variable-rate borrowers who took loans in 2020-2022 at sub-3% rates and have seen repayments jump 40-50% since mid-2022. Especially those who stretched serviceability at origination, used small deposits, or have seen income growth lag inflation.
Second group: offset users who’ve drained buffers. A borrower with a $500,000 loan and a $50,000 offset in 2023 might be down to $10,000 now, no longer smoothing the rate-hike impact. That’s visible in transaction account behaviour before it shows up as a missed payment.
Third: self-employed borrowers and casual workers whose income has softened but not collapsed, earning enough to keep paying, not enough to rebuild buffers. They stay current but move onto the watchlist because forward indicators (cash flow, deposit patterns) have deteriorated.
Mortgage lending falls $5.4bn: serviceability or cycle? covers how tighter serviceability and falling applications intersect.
What could change the trajectory
Base case: watch loans keep rising for the next two quarters as rate-hike effects compound, then plateau if the RBA holds or cuts by late 2026. Actual arrears tick up slightly but stay well below GFC levels, because employment holds and most borrowers have enough equity to refinance or sell before defaulting.
Downside: a second wave of rate hikes if inflation proves stickier, or unemployment rises faster than the RBA’s forecast 4.3% by year-end. Watch loans convert to arrears at a higher rate, provisions jump, and banks tighten lending further, creating a negative loop where fewer approvals mean weaker price support and higher loan-to-value ratios for existing borrowers.
Upside: RBA cuts in Q3-Q4 2026, unemployment stays below 4.5%, and watch loans shrink as repayment buffers rebuild. The watchlist expansion was precautionary, not predictive.
The signal to track: whether other majors report similar collective provision increases and watchlist trends in their own third-quarter updates. If NAB is an outlier, it’s a credit-mix story. If it’s system-wide, it’s an early-stress story.
What this means for borrowers and investors
If you’re refinancing or applying for new credit in the next 90 days, expect tighter scrutiny on living expenses, offset balances, and income stability, even if your repayment history is clean. Banks are pricing in stress that hasn’t surfaced yet, and that shows up as higher rates for borderline serviceability or declined applications that would have been approved 12 months ago.
For property investors watching the market: rising watch loans and falling applications both point to reduced credit availability, which caps price growth even if demand holds. Fewer approvals mean fewer buyers, and that matters more for prices than sentiment surveys.
Bank mortgage exposure: why Australia’s biggest home lender faces the steepest fall explores how concentrated mortgage books amplify system risk.
If you’re holding investment property and carrying variable debt from 2020-2022 vintages, pressure-test your cashflow against another 25 basis points of rate rises or six months of vacancy. The watchlist data suggests banks are preparing for a cohort of performing loans to tip into hardship, and investors with thin serviceability buffers are in that cohort.
Start here: check your offset balance, calculate your actual interest cost after offset, and compare your current serviceability against what you’d qualify for today. If the gap is wide, rebuild buffers or lock in fixed rates on the next refinance.
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General info, not financial advice.
