New rules ban ‘snowballing’ council rates interest amid debt crisis

Victorian councils will be legally required to offer flexible payment plans to stressed ratepayers and stop charging “snowballing” interest on deferred rates under rules designed to tackle the “postcode lottery” of suburban debt.

Under ministerial rules that came into effect this week, the state’s 79 councils must provide “modern and flexible” payment options, such as monthly or fortnightly billing, for residents struggling with the cost of living.

Councils must now also lower the threshold for residents seeking help. Ratepayers no longer need to prove total financial ruin to qualify for a deferral or payment plan; they must only show that payment would cause “hardship” to their current quality of life.

However, to have rates waived entirely, they must demonstrate they cannot afford the “necessities of life”, now explicitly defined by the state to include food, medicine and essential utilities.

The guidelines also tackle the cumulative “snowball” interest charges that have driven vulnerable residents deeper into debt. Councils are now forbidden from charging interest during approved deferral periods.

They are also “discouraged” – but not banned – from applying any penalty interest in hardship cases.

The policy shift is a response to a 2021 investigation by then-ombudsman Deborah Glass, which found many councils were “too quick to sue” and did not tell residents they were eligible for waivers and deferrals, even when they were.

Each council had its own policies on arrears, some more harsh than others.

The ombudsman found that some residents, including victims of family violence, were being driven out of their homes by heavy-handed debt collectors.

Local Government Minister Nick Staikos said: “By providing clear guidance, we’re giving councils the tools they need to support vulnerable Victorians facing prolonged hardship or unforeseen hurdles such as job loss, illness or other changes to family circumstances.”

The move comes amid a deepening arrears crisis for Victorian councils, according to analysis from rates collection firm Payble. The state average for unpaid rates reached a high of 10.44 per cent in the 2024-2025 financial year after a 32 per cent rise in the total amount of money owed since the previous year.

Early data for the 2025-26 years suggests the crisis is accelerating, with an average of 11.6 per cent of households in arrears across the state, according to Payble.

The data reveals outer-suburban growth corridors are under severe strain. Almost 20 per cent of residents are behind on their rates in the council areas of Yarra Ranges and Whittlesea – making them the highest arrears levels in Greater Melbourne. They are followed by City of Port Phillip (18.87 per cent), City of Brimbank (17.69 per cent) and City of Frankston (16.84 per cent).

Stress is also hitting more affluent areas. In Stonnington, there was a 66.6 per cent rise in the total amount of money ratepayers owed between 2023-2024 and 2024-2025, one of the sharpest changes in the state.

Payble chief executive Elliott Donazzan said many residents’ problems started in the COVID-19 period.

“Enforcement pauses were necessary at the time, but many ratepayers misunderstood them as rate relief rather than deferral,” Donazzan said. “The result is that arrears have been building quietly in the background, only becoming visible once economic pressures intensified and household budgets tightened.”

Some councils are more dependent on resident and commercial rates than others, according to the 2021 ombudsman report, which showed rates accounting for as little as 30 per cent of revenue in some councils and more than 70 per cent in others.

Local government areas with a lower socio-economic status tend to have higher levels of rates arrears, but one outlier is the City of Dandenong. Unlike many councils, Dandenong offers the option for people to pay their rates in automated “bite-sized” weekly and fortnightly instalments, and its arrears rate has improved over time.

Greater Dandenong Mayor Sophie Tan said monthly instalments were a popular option that helped people avoid falling behind in the first place.

“Paying the traditional lump sum or in quarterly instalments is challenging for people on a tight budget,” she said. “Everyone’s circumstances are unique, and financial challenges impact people differently.”

The peak body for councils, the Municipal Association of Victoria, welcomed the new state guidelines and said councils were committed to working with the state to stop arrears spiralling.

“When residents aren’t forced into crisis, they’re better able to participate in local life and recover economically,” association president Jennifer Anderson said.

The state government has capped rate increases at 2.75 per cent for the 2026-27 financial year to further ease cost-of-living pressures.

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