Residential mortgage arrears in Australia have hit its lowest level in 11 years, according to the Dinkum Index from Fitch Ratings. The level of arrears has reached 0.95 per cent in the December quarter—20 basis points lower than it was a year ago. Actual loss rate in loans is just 0.02 per cent due to rising property prices in major cities. This allows lenders to recoup the value of their loans in the event of borrower defaulting.

The Dinkum Index tracks the performance of a large number of loans that had been bundled up and sold by lenders to other investors.

According to Fitch Ratings' report, "The level of arrears in the fourth quarter of 2015 reflected strong house price growth, low unemployment, low standard variable rates, and low inflation."

However, Moody's Investor Service showed that delinquencies may have also found their lowest point. Moody's is expecting a small rise of arrears in the states that are most dependent on resources, such as Western Australia, the Northern Territory, and parts of Queensland. Australian lenders have also started tightening their home loan application rules as they brace for slower price growth in the housing market.

Still, Fitch says that mortgage losses are likely to remain limited in the near future despite the possible slowdown in price growth due to tighter serviceability assessments recommended by the Australian Prudential Regulation Authority.

"The introduction of measures, such as interest rate floors, means borrowers should have more buffers to withstand increases in interest rates and unemployment, and a slowdown in the housing market," Fitch's report said.

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