Rising mortgage delinquencies and repossessions in the outback mining towns of Queensland and Western Australia are starting to bite the country’s biggest banks.

Sydney-headquartered Westpac is the latest major bank to report an increase in mortgage delinquencies and repossessions in these areas.

In its third-quarter update, Westpac said repossessions have jumped 10% due to weak conditions in the resource-rich states, a development that is likely to worry rivals with significant exposure in these areas. 

Last week, ANZ reported higher mortgage arrears for the third quarter, while CBA said it was hit with increased arrears in mining towns as well as outer metropolitan Perth.

“This is not yet generating much in loan losses, but if it continues it would be more of an issue for CommBank and ANZ,” said Brian Johnson, head of Asia banks research at CLSA. He also added that about 17% of CBA’s mortgage portfolio is in Western Australia, compared to only 9% at Westpac and 10% at NAB.

About 17% of CBA’s mortgage portfolio is in Western Australia, compared to only 9% at Westpac and 10% at NAB, Johnson said.

The fortunes of Australia’s Big Four are closely tied to the performance of the housing market, with the group holding a combined market share of more than 80% of the home loan market.  

The economic downturn in iron ore-rich Western Australia and parts of Queensland are a growing concern for the banks, who are otherwise benefitting from high growth in Sydney and Melbourne’s property markets.   

Westpac said it’s on track to limit new interest-only loans to below the 30% cap set by the Australian Prudential Regulation Authority (APRA). This regulatory cap is designed to restrain runaway house prices, particularly in the east coast capitals.

Banks have recently started charging around 50 basis points for interest-only (IO) mortgages, which is much lower than the interest rates imposed on interest-and-principal (P&I) mortgages.

Shane Oliver, chief economist at AMP Capital, said the new measures would place greater pressure on delinquency rates. “Often people are on interest-only for a reason,” he said.