Format: Case Study

Context: A relief rally with warning lights still flashing

After a rapid rate hiking cycle, Australia entered a tentative easing phase. Headline delinquency metrics began to improve: industry reporting indicates national mortgage arrears around 0.89% in the June quarter of 2025, down from roughly 0.97% earlier in the year. Yet the simple narrative that “lower rates equal fewer arrears” misses key dynamics on the ground.

Three forces complicate the picture. First, households are exiting ultra‑low fixed loans onto materially higher variable rates; the so‑called fixed‑rate cliff continues to roll through 2024–2025 cohorts. Second, living‑cost inflation has re‑priced essentials, so disposable income relief from modest rate cuts is partially absorbed by groceries, energy and insurance. Third, labour market conditions—while far from crisis—have softened at the margins, adding income volatility for casual and self‑employed borrowers.

Arrears behave non‑linearly under these conditions. Early‑stage delinquencies (30–59 days past due) tend to stabilise first when rates fall. Severe arrears (90+ days), which embed deeper income shocks and accumulated fees, cure more slowly and can keep rising even as the headline metric improves. Ratings agencies and prudential data have echoed this divergence across lender types: major banks with strong loss‑mitigation capabilities stabilised faster than non‑banks exposed to riskier segments and funding cost pass‑through.

Decision: The industry’s pivot from blunt defence to targeted relief

Through late 2024 and into 2025, the decision set for lenders and brokers shifted from protection to precision:

• Rebalance risk appetite: tighten on high‑DTI new lending while easing, selectively, for strong back‑book customers to retain relationships and reduce churn.
• Refi triage over price wars: prioritise refinances that materially reduce payment burdens (term extensions, partial principal holidays) rather than blanket cashback campaigns that erode margins.
• Serviceability policy recalibration: maintain prudent buffers but offer verified expense overrides for low‑volatility income profiles; consider bespoke pathways for near‑prime borrowers with strong collateral.
• Collections to care: reframe hardship from a collections cost centre to a retention strategy, with measurable targets for cure rates and NPS.

Regulatory settings remained appropriately cautious: buffers and responsible lending obligations acted as guardrails. The debate abroad—such as UK discussions on easing stress tests—provided context but not a blueprint; Australia’s high household debt warranted a “carefully measured” approach to balance access and stability.

Implementation: What moved the needle operationally

The lenders showing the fastest normalisation executed five pragmatic plays.

• Early‑warning analytics: portfolio “segment of one” models that flag payment risk using transaction data (utilities, rent, BNPL signals), not just bureau delinquencies. Trigger‑based outreach began 30–45 days before first missed payments.
• Friction‑light hardship pathways: self‑service portals offering short, time‑boxed arrangements (60–120 days), automated interest‑only switches, and dynamic payment plans. These reduced call centre load and cut decision times from weeks to days.
• Precision pricing and retention: micro‑repricing for at‑risk but valuable customers, combined with targeted term extensions (e.g., 25 to 30 years) to deliver 8–12% payment relief without permanently impairing yield.
• Broker enablement: real‑time hardship eligibility and refinance feasibility embedded in broker CRMs, reducing attrition and improving first‑time‑right submissions.
• Funding strategy alignment: non‑banks with warehouse and RMBS facilities focused on seasoning and transparency, pre‑positioning for tighter securitisation spreads as arrears stabilised.

Results: Relief at the headline, pressure in the tail

The aggregate picture into mid‑2025 is clearer than the original headlines imply.

• Headline arrears improved: national arrears near 0.89% in the June quarter of 2025 versus roughly 0.97% earlier—consistent with lower effective rates and targeted hardship support.
• Severity divergence persisted: 30–59 day buckets stabilised first; 90+ day arrears remained elevated relative to pre‑hike baselines, reflecting deeper affordability issues and slower cures.
• Lender dispersion widened: majors outperformed on cures and loss containment; non‑banks and specialist lenders faced higher arrears due to borrower mix and funding cost pass‑through.
• Provisioning discipline held: banks maintained prudent overlays rather than aggressive write‑backs, recognising the long tail risk and macro uncertainty.

Cross‑domain policy evidence adds texture. Wisconsin’s child‑support reform, which reduced interest on arrears, suggests that lowering penalty rates can slow arrears growth and lift payment compliance—an instructive analogue for how pricing relief and simpler repayment structures can change borrower behaviour. While not a mortgage market, the behavioural direction is consistent with Australia’s mid‑2025 experience: reduce friction, improve cures.

Lessons: What business leaders can bank on

Five lessons stand out for lenders, fintechs and investors.

• Arrears are a lagging indicator: expect a multi‑quarter lag between rate cuts and sustained improvements in 90+ day buckets. Plan capital, staffing and funding accordingly.
• Precision beats generosity: targeted relief to borrowers with verifiable capacity and strong collateral creates better risk‑adjusted outcomes than broad price cuts.
• Speed matters: digitised hardship and pre‑delinquency outreach reduce cure times and roll rates. The payoff shows up in lower credit losses and higher customer lifetime value.
• Funding and credit are joined at the hip: lenders that align securitisation strategies with transparent arrears reporting and seasoned pools can recapture spread as markets stabilise.
• Don’t mistake direction for destination: a few quarters of improvement do not erase household leverage risks. Maintain overlays and invest in early‑warning infrastructure.

Technical deep dive: How to read the signals

Arrears metrics can mislead if read in isolation. Three technical checks improve decision quality:

• Vintage analysis: track delinquency curves by origination cohort; late‑cycle vintages typically carry higher risk, and stabilisation should be assessed cohort‑by‑cohort, not just portfolio‑wide.
• Bucket migration: monitor transitions (current to 30+, 30+ to 60+, 60+ to 90+) rather than static levels. A falling 30+ paired with a rising 90+ signals backlog, not resolution.
• Cure rate quality: distinguish cures via genuine repayment normalisation from structural fixes like term extensions or interest‑only periods. Both are valid, but they have different implications for lifetime losses and capital.

Future outlook: Strategy under a lower‑for‑longer, volatile‑for‑longer regime

Global rate paths will remain choppy. Australia’s household debt levels amplify sensitivity to even small rate moves, making operational agility a durable competitive edge. Expect three shifts: more granular pricing of risk at acquisition, embedded hardship tooling in mainstream banking apps, and securitisation structures that reward transparent arrears reporting. Early adopters that treat hardship as a loyalty engine—and invest in data to intervene before distress hardens—will capture share as the cycle normalises.

The takeaway for boards and executive teams is straightforward: celebrate the headline improvement, but fund for the long tail. Victory here is not avoiding arrears; it’s engineering faster, cheaper cures than your competitors.