The number of mortgage delinquencies is set to increase due to a wave of loans set to convert from interest only to principal-and-interest.
According to Moody's Investor Service, $500 billion worth of loans will switch over in the next five years, with high debt levels and falling house prices a concern to the global ratings agency.
Moody's found that 0.94 per cent of loans that had converted to principal-and-interest from interest-only were 90 days or more overdue, double the rate of borrowers on an interest-only loan.
Borrowers are now feeling the impacts of tighter credit curbs and stricter lending policies emplaced by major banks.
Borrowers, previously able to refinance interest-only loans at the end of the interest-only period, are now struggling after the prudential regulator limited banks to allow this type of lending to just 30 per cent of all new business.
Tougher standards on borrower income and expenses is also leaving interest-only customers unable to refinance.
“We expect mortgage delinquencies in outstanding residential mortgage-backed securities to increase moderately in 2019 given the cooling housing market and Australia's record-high household debt, which amounts to 191 per cent of annual gross disposable income,” Moody's said.
“Although we do not expect material interest rate rises in the immediate future, Australian households remain vulnerable to an interest rate shock.”
“We expect the moderate price correction in Sydney and Melbourne to continue, reflecting reduced credit supply by the banking sector and a seeming reduction in demand from households.”
Related: Housing Finance Hits 5-Year Low
Lending peaked in 2014, led by property investors who sought to supercharge their borrowing power by taking out loans in which the principle typically isn't repaid for the first five years.
Such loans have been targeted by regulators in two waves of macro prudential restraints, in 2014 and 2017, amid concerns they were stoking dangerous house price bubbles in Sydney and Melbourne.
Sydney and Melbourne house prices have now slumped to 7.4 per cent and 4.7 per cent respectively.