Mortgage arrears are climbing as borrowers run down their savings and collide with a tighter refinancing market that has escalated financial stress, S&P Global says.

The credit ratings agency observed arrears in residential mortgage backed securities rose notably for prime and less stable non-conforming securities, which it attributed to ‘‘rising interest rates and cost-of-living pressures’ weight on debt serviceability’’.

‘‘The cumulative effect of multiple interest rate rises is taking effect and borrowers’ savings buffers are eroding as the cost of living rises,’’ S&P said.

While refinancing had so far ‘‘tempered arrears’’, this market has tightened as the Reserve Bank lifts interest rates and banks put an end to aggressive cashback incentives, moderating competition. This, according to S&P, will mean ‘‘tougher’’ conditions and lead to more arrears later this year.

‘‘As interest rates continue to rise, refinancing conditions are becoming tougher for many borrowers, particularly those who are more highly leveraged. This is likely to add to arrears pressure because refinancing is a common way for borrowers to self-manage their way out of financial stress.’’

The worst hot spots for arrears in NSW are the Blue Mountains suburb Katoomba (5.6 per cent of loans in arrears), Sydney suburbs Bonnyrigg (4.9 per cent), Dolls Point (4.9 per cent) and Allawah (4 per cent), and the Southern Highlands suburb of Alpine (4.5 per cent).

Forrestfield in Western Australia (4.9 per cent), Avoca Dell in South Australia (4.1 per cent) and Barkly in Queensland (4 per cent) underperformed. In Victoria, Broadmeadows (4.1 per cent) and West Melbourne (4.2 per cent) stood out for arrears.

Prime RMBS arrears rose from 0.76 per cent in December to 0.95 per cent in March to ‘‘nudge up against long-term averages’’. Non-conforming arrears lifted from 3.2 per cent to 3.7 per cent, but were ‘‘unlikely to reach financial crisis peaks’’, the ratings agency said.

Lead analyst Erin Kitson told The Australian Financial Review the uptick was ‘‘reasonable’’, but said predicting how much further bad loans would rise was impossible given the dispute around the RBA’s intentions.

The RBA has lifted the cash rate in 11 of the past 12 meetings to 3.85 per cent, tightening monetary policy to fight runaway inflation which raced to 7 per cent in the March quarter.

Ms Kitson said the severity of arrears would ‘‘depend on the duration of the interest rate rises’’. ‘‘As long as interest rates go up, arrears will go up as well because people have to find more money to pay their mortgage,’’ she said.

Historically low unemployment of 3.7 per cent had put a floor under arrears, she said.

Despite this, S&P declared the overall economic and industry risks to the banking sector to be relatively low, in a separate report released on Monday. ‘‘The risk of a sharp price fall in property prices has eased,’’ S&P said.

‘‘Credit losses over the next two years should remain low, and close to pre-pandemic levels even as rate hikes erode debt serviceability for highly leveraged borrowers,’’ it said.

‘‘Nevertheless, banks in Australia remain exposed to elevated risk of a jump in credit losses due to high household debt, rising interest rates and uncertain economic conditions.’’