Australian households still managing to service their mortgage

Australian mortgage holders remain susceptible to financial stability risks, as higher inflation and rising interest rates continue to put pressure on household budgets.

The latest Financial Stability Review from the Reserve Bank of Australia (RBA) found that a small but rising number of borrowers are on the cusp, or in the early stages, of financial stress.

While the number of Australians seeking financial counselling has also been on the rise.

The review found that despite tougher conditions, the vast majority of Australian borrowers have continued to service their debts. 

In part, this is because some households have gained additional work, reduced discretionary consumption and/or drawn on savings buffers. 

The income and savings positions of borrowers have also allowed most to continue to meet their essential expenses and mortgage payments.

Few borrowers have fallen behind on their loan payments or sought temporary loan modifications. 

It said in the event that more borrowers became unable to service their loans, only a very small number would be in negative equity on their mortgage and as a result, losses to lenders are expected to remain low and manageable.

The sharp rise in interest rates has also seen housing sentiment drop dramatically for both owner-occupiers and renters.

With sentiment hitting the lowest level since the GFC.

According to the review, the borrowers most at risk were households on lower incomes, borrowers with high debt relative to their income, and fixed-rate borrowers yet to roll off onto much higher variable rates.

Lenders in the RBA’s liaison program have reported that borrowers have been more resilient than expected in their ability to service their debt, given the sharp rise in interest rates.

The review found that while a small but rising share of borrowers are on the cusp, or in the early stages, of financial stress, almost all borrowers have been able to make adjustments that have allowed them to continue servicing their debts. 

It found that before reaching this stage, households often contact their lender to enquire about options to restructure their loan or apply for temporary hardship, turn to alternative sources of finance or seek other forms of help. 

However, a growing share of households have sought financial counselling.

The National Debt Helpline (NDH), has seen demand for its services increase by around one-quarter from the low level experienced during Covid.

Some households contacting the NDH have been using ‘buy now, pay later’ products to finance their regular consumption.

At the same time, there is also little evidence that Australian households are turning to other forms of personal credit, such as credit cards or personal loans to maintain their spending.

According to the review, most borrowers are well placed to service their debts even if interest rates were to increase further.

It found that most owner-occupier borrowers are currently estimated to have sufficient income to allow them to meet their essential expenses and loan payments.

However, around 5 per cent of borrowers with insufficient income will need to draw down on available savings buffers or find additional work, to meet their essential expenses and mortgage payments.

About 70 per cent of these under-pressure borrowers have enough savings in their offset and redraw accounts to finance their cash flow shortfalls for at least six months, assuming interest rates remain around current levels 

However, the remaining 30 per cent of these borrowers (or around one and a half per cent of all variable-rate owner-occupier borrowers) are at risk of depleting their buffers within six months – and are at higher risk of falling into arrears on their housing loan. 

Lower-income borrowers are over-represented in these groups as they are more likely to have difficulties covering their essential costs and mortgage payments.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.