Price-sensitive home borrowers suffered an affordability shock in the December quarter after Australia's softening housing market started to bite.
Mortgage arrears, or the proportion of mortgages for which repayments are more than 30 days past due, climbed to a near record high, according to global credit ratings agency, Fitch Ratings.
The agency reported arrears of mortgages underlying Australian residential mortgage-backed securities (RMBS) touched 1.57 per cent by December 31, five basis points higher than the September quarter.
But the inclusion of recently issued RMBS transactions worth $4.7 billion in Fitch's quarterly delinquency index masked the real change in arrears which jumped 19 basis points to 1.71 per cent.
That was eight basis points off the record high reached a year ago, and a sign of a temporary shock in affordability, Fitch said in a statement.
Falling house prices was probably to blame since both unemployment and interest rates were stable or falling in the December quarter.
"Housing market stagnation might lead to arrears materialisation as the borrower who might otherwise have refinanced or repaid with sales proceeds falls into delinquency," James Zanesi, director of structured finance said.
More mortgage pain will have been felt in the March quarter, with Fitch predicting recent interest rate hikes by banks will have added to financial stress facing households as they battle to make post-Christmas payments.
However, more borrowers will try to escape the pain if they can find a significantly better deal on their mortgage at another lender, according to financial services researcher RFi.
Two-thirds of borrowers are purely price driven, and say any decision to refinance their mortgage is based solely on interest rates, RFi reported after surveying 2,036 borrowers nationwide in December.
Half of all borrowers would consider switching lenders if a competing institution offered a mortgage rate that was 0.5 to one per cent lower than their current rate, RFi said.
And 29 per cent would walk away from their current lender if a competitor cut the borrower's current rate by one per cent.
Half of borrowers holding either a residential or investment property loan have switched lender in the last three years.
Banks argue they need to raise interest rates independently of the Reserve Bank of Australia to cover higher funding costs, and that this justified their rate hikes in February.
But RBA assistant governor, (financial markets) Guy Debelle on Tuesday reiterated the importance of the official cash rate.
"The cash rate is still the primary determinant of movements in banks funding costs and lending rates," he told investors at Morgan Stanley's conference in Sydney.
"The link between the cash rate and lending rates here in Australia is much tighter than it is anywhere else in the world."