The type of borrower falling behind on their mortgage

October 28, 2026 — 5:14am

Borrowers who took out home loans requiring low documentation, including self-employed or small business owners, are falling into arrears at a greater level than the rest of the mortgage market.

Mortgages classed as non-performing, or 90 or more days behind on repayments, have remained relatively steady over recent years, sitting at 1.0 per cent of loans for the June 2026 quarter, according to Australian Prudential Regulation Authority data analysed by Canstar.

But arrears have edged higher for low-doc lending by banks recently, hitting 4.9 per cent of outstanding loans for the June quarter, up from 4.2 per cent at the same time in 2025.

The main originators of low-doc loans are non-bank lenders, and these types of loans comprise a small percentage of all mortgages among banks, experts say. Low-doc home loans are designed for small business owners and sole traders who aren’t able to provide full paperwork, including tax returns, to pass a bank’s standard serviceability checks.

Loans requiring low documentation may attract higher rates than traditional mortgages with recent rate hikes putting a “squeeze” on those paying higher than average rates, Canstar’s data insights director Sally Tindall said.

“When the RBA tightens the screws on mortgages, the pressure on low-doc borrowers tends to increase even further as they’re usually already paying a premium on their interest rate,” she said.

“If cash flow then tightens on the back of a cut down in consumer spending, those low-doc borrowers who don’t have a decent buffer can quickly find themselves with zero breathing room.”

According to research from Canstar, one non-bank lender offers an advertised interest rate for a low-doc home loan starting at about 7 per cent, but only if the borrower has 45 per cent equity in their loan. The rate then climbs to as high as about 12.29 per cent for those with smaller deposits.

APRA data shows low-doc loans comprise about 0.1 per cent of all mortgages among banks.

“However this does not illustrate the volume of low-doc loans in the broader mortgage market,” said Tindall, noting a number of non-bank lenders still offer these types of loans.

Erin Kitson, an analyst at S&P Global Ratings said, while not presenting a systemic risk, low-doc loans were more vulnerable to arrears, as it was often self-employed borrowers who take them out.

“The cashflows of these borrowers are more exposed to deteriorating economic conditions, including rising interest rates, given the more direct impact it has on their income,” she said.

“Borrowers with low-doc loans are more likely to experience arrears pressure before more traditional loan types, given the greater sensitivity of self-employed borrowers’ cashflows to changing economic conditions.”

Chief executive of mortgage brokerage Shore Financial Theo Chambers said higher rates and economic conditions could be a contributing factor to arrears levels, rather than low-doc borrowers being “necessarily higher-risk customers.”

“In reality, many are successful self-employed individuals and business owners with strong assets, substantial equity and healthy cash flow, but whose income doesn’t always fit the traditional assessment model,” he said.

“Low-doc loans are already priced at higher interest rates, and therefore they’ve had rate rises to an already higher rate, coupled with pressure on higher living costs have placed on households and small businesses.”

Anthony Landahl, managing director at mortgage broker Equilibria Finance said all the banks had “good, strong, attractive offers” for self-employed borrowers.

“Low-doc loans are mainly provided by second-tier providers, as distinct from the main banks, but they absolutely still have a role in our lending space,” he said.

“And there is a bit of a misconception around low-doc loans that they’re more risky. But we don’t find that they’re more risky by their nature. Many low-doc borrowers are successful self-employed Australians whose income doesn’t fit traditional PAYG [Pay As You Go] lending models.”

Landahl said there were strong lending standards.

“It’s still got to meet all of the consumer lending criteria. Verification requirements are still strong, and borrowers ultimately need to demonstrate they can service the loan.”

Kitson said arrears spikes for low-doc loans could be more pronounced than other loan types because of the declining balance outstanding of these types of loans across the broader mortgage market.

“Based on APRA stats, they now comprise around 0.12 per cent of total loans outstanding, down from 0.88 per cent back in 2019, so the declining denominator will cause a more pronounced increase in arrears in percentage terms,” she said.

Mortgage arrears across the country remain low despite a recent pickup, according to the RBA, with support from the strong labour market and savings buffers.

But Kitson said recent interest rate rises are yet to surface in mortgage arrears performance as there is often a lag between a rate increase and the increase in a borrower’s actual mortgage repayment.

“Rising cost-of-living pressures are not yet manifesting in material arrears increases. Mortgage arrears are one of the last places for financial pressure to manifest,” she said.

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