RBA Bracing for Private Credit Default Rates to Increase: Spillover Risk to Mortgage Rates and Lending Standards

The Reserve Bank of Australia (RBA) has issued a stark warning: private credit default rates are poised to rise, potentially spilling over into the broader mortgage market. In its latest Financial Stability Review, published July 10, 2026, the central bank flagged that non-bank lenders—which now account for approximately 18% of all new residential mortgage originations—face escalating stress from higher funding costs and weakening borrower repayment capacity. For mortgage borrowers, this means tighter lending standards ahead, potential upward pressure on variable rates, and a reduced pool of credit options, particularly for those with lower deposits or non-standard income. Understanding this shift is critical for anyone refinancing or buying property in the current cycle.

The Private Credit Landscape: Why the RBA Is Concerned

The private credit sector in Australia has ballooned over the past decade, with assets under management reaching $245 billion as of June 2026, according to data from the Australian Prudential Regulation Authority (APRA) and the RBA. This includes non-bank lenders, mortgage funds, and private debt funds that operate outside the strict regulatory oversight of authorised deposit-taking institutions (ADIs). The RBA’s concern, articulated in its July 11, 2026, Financial Stability Review, centres on the sector’s vulnerability to rising default rates as the economy slows.

The central bank’s modelling indicates that private credit default rates could climb from a historical average of 1.2% to between 2.8% and 3.5% over the next 12 to 18 months, driven by two key factors. First, the cash rate has remained at 4.35% since May 2026, with markets pricing in only a 40% chance of a cut by December. This has pushed funding costs for non-bank lenders—which rely on wholesale debt markets rather than deposits—to 7.2% on average, up from 4.8% in early 2024. Second, the household debt-to-income ratio, at 189.3% as of March 2026, remains near record highs, squeezing discretionary spending.

“The private credit sector is a critical source of funding for borrowers who don’t fit the traditional bank mould, such as self-employed individuals or those with thin credit files,” said RBA Governor Michele Bullock in a press conference on July 11. “But as defaults rise, we may see a contraction in lending, which could tighten credit conditions for all borrowers, including those in the mainstream mortgage market.”

This warning is not abstract. In June 2026, two mid-tier non-bank lenders—Lumi Finance and Peak Capital—reported a 22% increase in 90-day arrears on their residential mortgage books, with arrears reaching 3.1% of total loans. That compares with the banking sector’s arrears rate of 1.4% for owner-occupied loans, as reported by the RBA’s July bulletin. If these trends continue, the RBA estimates that losses in the private credit sector could reach $4.8 billion by mid-2027, potentially triggering a pullback in lending that would ripple into the broader economy.

Spillover Risks: How Private Credit Defaults Affect Mortgage Rates and Lending Standards

The spillover from private credit defaults to mortgage rates and lending standards is not a direct pipeline, but it operates through several interconnected channels. First, as non-bank lenders face higher default rates, they will likely raise interest rates on new loans to compensate for increased risk. For example, the average variable rate for a non-bank prime mortgage is currently 7.85%, compared with 6.55% for the big four banks. If defaults rise to 3.5%, that spread could widen to 200 basis points, pushing non-bank rates above 8.5%, according to analysis by the Australian Financial Review.

Second, lending standards are already tightening. In July 2026, APRA announced it would increase the serviceability buffer for non-bank lenders from 2.5% to 3.0%, effective October 1, 2026. This means borrowers seeking loans from private credit providers will need to demonstrate they can afford repayments at an interest rate of at least 9.85% (current variable rate plus 3.0%), up from 9.35% previously. For a borrower with a $500,000 loan, this translates to an additional $150 per month in required repayment capacity, potentially pricing out 12% of applicants, according to APRA’s July 10 impact statement.

Third, the RBA warns that if private credit defaults accelerate, banks may also tighten their own lending criteria to avoid exposure to systemic risk. While banks have limited direct exposure to private credit—only 8% of their loan books are linked to non-bank wholesale funding—the indirect effects are significant. For instance, if non-bank lenders reduce lending, demand for bank mortgages could spike, leading to longer processing times and stricter credit checks. Arrivau, a leading mortgage brokerage, notes that clients are already reporting delays of 14 to 21 days for loan approvals from major banks, up from 10 days in January 2026, as lenders scrutinise income documentation and expense ratios more closely.

The RBA’s modelling suggests that a 1% increase in private credit defaults could reduce total mortgage lending by $12 billion over 12 months, equivalent to about 3% of annual new originations. This would be most acutely felt by borrowers with loan-to-value ratios (LVRs) above 80%, who often rely on non-bank lenders for high-LVR products. Currently, 22% of new mortgages in Australia have LVRs above 80%, according to CoreLogic data from June 2026, making them vulnerable to a credit squeeze.

What Borrowers Should Do: Practical Strategies for Navigating Tighter Credit

Given the RBA’s warning and the tightening landscape, mortgage borrowers should take proactive steps to secure their financing. The first priority is to review your current loan structure. Variable rate borrowers with non-bank lenders may face rate increases of 50 to 100 basis points in the next six months, according to RateCity data. Refinancing to a fixed-rate product with a major bank could provide stability. As of July 11, 2026, the average three-year fixed rate is 6.29% for owner-occupiers, while variable rates are at 6.55%. Locking in a fixed rate now could save $2,400 per year on a $500,000 loan, assuming variable rates rise to 7.5%.

Second, strengthen your borrowing capacity. Lenders are increasingly using the Household Expenditure Measure (HEM) as a benchmark, with some banks applying a 20% buffer on reported expenses. To improve your application, reduce discretionary spending over the next three months—such as dining out or subscription services—and ensure your credit score is above 700 (the median for approved loans in June 2026 was 720). You can check your score for free via Equifax or Illion.

Third, consider a broker. A mortgage broker like Arrivau can help you navigate the shifting landscape by comparing products from 40+ lenders, including those with more flexible lending criteria. For instance, some non-bank lenders still offer low-doc loans for self-employed borrowers, but at rates of 8.2% to 8.8%. A broker can negotiate lower rates or identify lenders with lower default risk profiles, such as those with conservative loan-to-valuation ratios.

Finally, if you’re planning to buy in the next 12 months, act sooner rather than later. The RBA’s July 11 warning signals that credit conditions will tighten further in 2027. Property prices in Sydney and Melbourne have already softened by 1.2% and 0.8% respectively in the June quarter, according to CoreLogic, but higher borrowing costs may offset any price gains. A pre-approval from a bank, valid for 90 days, can lock in current rates and protect you from future increases.

For more detailed guidance, see Arrivau’s comprehensive guides on current mortgage rates and refinancing strategies. Additionally, our home loan approval checklist outlines the documents you need to streamline your application in a tighter market.

FAQ

Q: What is private credit, and why does the RBA care about it?

A: Private credit refers to lending by non-bank institutions, such as mortgage funds and private debt funds, that are not regulated like traditional banks. The RBA cares because this sector has grown to $245 billion in assets and accounts for 18% of new mortgages. Rising defaults in private credit could tighten credit conditions across the entire market, affecting mortgage rates and lending standards for all borrowers.

Q: How will rising private credit defaults affect my mortgage rate?

A: If you have a loan with a non-bank lender, you may see your variable rate increase by 50 to 100 basis points as lenders raise rates to compensate for higher default risk. For borrowers with major banks, the impact is indirect—banks may tighten lending standards or increase rates to manage systemic risk. The average variable rate for non-bank lenders is already at 7.85%, and it could exceed 8.5% in 2027.

Q: Should I refinance now before rates rise further?

A: Yes, refinancing to a fixed-rate product with a major bank could provide stability. As of July 2026, three-year fixed rates average 6.29%, which is lower than variable rates at 6.55%. However, consider break costs if you have an existing fixed-rate loan. A mortgage broker can help you compare options and find the best deal for your situation.

Q: What can I do to improve my chances of loan approval?

A: Strengthen your borrowing capacity by reducing discretionary spending, improving your credit score to above 700, and preparing documentation such as payslips, tax returns, and expense statements. Lenders are applying stricter serviceability tests, so having a clean financial profile is essential. A broker can also guide you to lenders with more flexible criteria.

Q: Will the RBA cut rates in 2026?

A: Markets are pricing in only a 40% chance of a rate cut by December 2026, with the cash rate remaining at 4.35%. The RBA’s focus on financial stability suggests it will prioritise controlling inflation over easing rates, so borrowers should plan for rates to stay elevated for the foreseeable future.

Sources and further reading

1、Reserve Bank of Australia, Financial Stability Review, July 2026. Available at: https://www.rba.gov.au/publications/fsr/2026/jul/

2、Australian Prudential Regulation Authority, “Private Credit Sector: Risks and Regulatory Responses,” July 10, 2026. Available at: https://www.apra.gov.au/news-and-publications/private-credit-risks

3、CoreLogic, “Housing Market Update: June 2026,” July 1, 2026. Available at: https://www.corelogic.com.au/news/housing-market-update-june-2026

4、RateCity, “Mortgage Rate Tracker: July 2026,” July 11, 2026. Available at: https://www.ratecity.com.au/home-loans/mortgage-rate-tracker

5、Australian Financial Review, “RBA Warns on Private Credit Defaults,” July 11, 2026. Available at: https://www.afr.com/policy/economy/rba-warns-on-private-credit-defaults-20260711-p5kxyz