Despite interest rates rising at a record pace, the number of mortgage holders in arrears remains around the long-term average of 1%. However, households in the outer suburbs of the major capital cities are likely to be the ones facing the most pressure from higher rates.

According to new data from S&P Global Ratings mortgages ‘more than 30 days late’, are highest in Sydney’s south-west, with 2.5% of borrowers behind in their repayments followed by borrowers in Perth’s north-west, Melbourne’s north-west and the Blue Mountains.

Director of structured finance ratings at S&P Global Ratings said the areas experiencing the most pressure were typically in locations where there are high proportions of first home buyers who might be highly leveraged. She said that the while the arrears rate had been rising recently, they were still a long way off the peak during the global financial crisis (GFC) when arrears reached 1.8%.

Ms Kitson said that unemployment and the resulting loss of income was a “key cause of mortgage defaults” – but given Australia’s unemployment has remained at record-low levels – this has helped keep arrears low.

She also said that many borrowers had also been able to build up a substantial savings buffer over the past few years, while the competitive refinance market has allowed mortgage holders to keep their interest rates manageable.

Despite that, there are still areas that are doing worse than others, led by the outer suburbs of the major capital cities. Ms Kitson said that Sydney’s south-west region had the highest arrears in May of over 2.2%. Perth’s north-east also saw arrears reach around 2%, along with Melbourne’s north-west, Sydney’s Outer West and the Blue Mountains area while other outer ring areas of Melbourne and Perth also had arrears rates of around 2%.

According to Ms Kitson, the outer areas often attract first home buyers, who are more susceptible to rate increases because they are generally on lower incomes.

“If we look at arrears rates across our capital cities, the trend that starts to become apparent is that mortgage arrears are certainly higher on the outskirts and fringes of capital cities compared to inner-city areas,” she said.

“If you think about the types of borrowers and why that might be the case, housing is typically more affordable on the cusps on the fringes of capital cities. This is likely going to attract the types of borrowers like first home owners, for example, who – given their stage in life – are often more deposit constrained and therefore need to be more highly leveraged; they need to take on more debt. These types of borrowers are going to be more susceptible to high interest rate rises, given they may not have the saving buffers available to older borrowers,” she added.

She said mortgage arrears tend to be far lower closer to the CBD, where incomes are generally a lot higher than in the outer suburbs.

“Those higher income levels and areas where you’ve got borrowers on those high-income levels, they’re, probably not going to be experiencing the same level of debt serviceability pressure, as areas where those income bands and proportions are not as high,” she said.