Mortgage arrears are increasing, particularly for Commonwealth Bank of Australia.

Some of the biggest loan providers in Australia are seeing worsening home loan arrears as rising costs and muted income growth burden households.

One of them is the Commonwealth Bank of Australia (CBA). In a think piece on The Motley Fool, industry watcher Tristan Harrison said the number of CBA loans in arrears by more than 90 days have been increasing, from 0.52% in 2015 to 0.70% in 2018.

Principal & interest and interest-only loan arrears have been climbing since last year, with the latter showing an increase earlier in July 2017.

"This suggests that the riskiest borrowers are the ones that are facing the most problems," Harrison said, adding that the most recent loans are the most likely to be unpaid by borrowers.

"These borrowers will have taken on the largest loans due to the property market hitting its peak. It also means those new borrowers are experiencing the largest increases to their payments with the recent interest rate rises over the past year," Harrison explained.

Of all the states and territories, Western Australia and the Northern Territory showed the highest levels of arrears, with both owner occupiers and investors failing to meet their duties.

Apart from the obvious culprit, Harrison believes the trend could be due to the number of loans switching from interest-only to principal payments.

Over the next three years, the interest-only period for many loans will end and borrowers will have limited choices on where to go next, given that lenders will be following the 30% limit rule. Additionally, lenders will have to apply serviceability tests to interest-only loan applicants.

"If these tests had been in place all along the housing market probably wouldn’t have performed so strongly and many borrowers may not have actually received a loan," Harrison said.

He added: "Hopefully the arrears don’t get much worse, or else we may see continued house price falls for many months to come."

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