Australia's New Debt-to-Income Limits and Mortgage Pressures

Australia's New Debt-to-Income Limits and Mortgage Pressures

The Australian housing market is experiencing a severe squeeze from higher-for-longer interest rates and aggressive macroprudential tightening, which is triggering a historic shift in household payment priorities. New data from June 2026 reveals that first-home buyers are bearing the brunt of the interest rate shock, while broader mortgage stress is forcing households to restructure which debts they pay first.

First-Home Buyers Left Stranded in Negative Equity

Three interest rate hikes in six months by the Reserve Bank of Australia (RBA) have pushed first-home buyer (FHB) mortgage delinquencies to a seven-month high.

• According to Equifax data from June 2026, 90-day arrears among FHBs are nearly double those of other borrowers.
• FHBs who entered the market under the federal 5% Deposit Scheme (which saw a surge in late 2025, especially among 18-25 year-olds) are now highly vulnerable. Having made only a 5% down payment, these buyers face a high risk of negative equity and losing their entire initial investment if forced to sell.
• Equifax reports FHB 30-day arrears across key Australian states as follows:
  • Victoria & Western Australia: 0.89%
  • New South Wales: 0.75%
  • South Australia: 0.69%
  • Queensland: 0.66%
• In comparison, non-first-home buyers are faring much better, with arrears hovering between 0.3% and 0.5%.
• Morgan Stanley recently warned of a potential 10% national decline in home values—the largest housing correction in at least 40 years—which would wipe out the remaining equity of recent small-deposit buyers.

A Historic Shift in Household Payment Hierarchies

A groundbreaking June 2026 analysis from Experian has revealed a fundamental shift in how stressed Australian households prioritize their debt payments. Historically, mortgages have been treated as the ultimate "sacred cow" debt that households will protect at all costs, letting credit cards and other consumer loans default first.

However, Experian's analysis of borrowers holding multiple debt products has shown that this payment hierarchy is breaking down under severe stress:

• Mortgages matched credit cards as the product most likely to fall behind first at 90 days past due¹ in the 12 months to December 2025.
• Auto loans are now prioritized over mortgages. Auto loans were the least likely product to slip first, as households actively choose to maintain car repayments over home loans. Experian notes this is because access to a vehicle is tied directly to day-to-day employment, school runs, and essential travel, making it more critical to daily survival than maintaining mortgage payments in the short term.
• Segment Divergence: The breakdown in the payment hierarchy is highly segmented. Among borrowers over the age of 55, mortgages had a 75% probability of slipping before auto loans once accounts reached 90 days past due. Conversely, affluent suburban households were more likely to fall behind on mortgages first under severe stress, while lower-income or regional households were more likely to miss credit card and personal loan payments before a home loan.

These findings suggest that lenders can no longer rely on traditional credit assumptions that mortgages will be paid first, and must instead monitor early-stage multi-product arrears to capture true household distress.