According to mortgage market analysts Digital Finance Analytics, around 20 per cent of borrowers holding an owner-occupied home loan would “have difficulty” paying off loans if the interest rate were to rise by less than 0.5 per cent.
Of this category, "young affluent" borrowers would struggle most, the principal of the analyst company, Martin North, has said.
Writing on his blog, Mr North said: “[A]round 20 per cent [of owner-occupied borrowers] would have difficulty with even a rise of less than 0.5 per cent, whilst an additional 4 per cent would be troubled by a rise between 0.5 per cent and 1 per cent, and so on. Around 35 per cent could cope with even a full 7 per cent rise.
“If we overlay our household segments, we find that young growing families and young affluent households are most exposed to a small rate rise… Younger households are relatively more exposed, because their incomes tend to be more limited and are not growing in real terms relative to mortgage repayments.”
According Mr North’s calculations, should interest rates increase by less than 0.5 per cent, the probability of "young affluent" borrowers defaulting on their mortgage repayments over the next 12 months would be 4 per cent. Similarly, "young growing families" had a rate of just under 4 per cent.
However, for rate rises of between 0.5 per cent and 7 per cent, the sensitivity rate was found to be less than 2 per cent across all segments, with "rural families" and the "suburban mainstream" being most vulnerable to default.
If rates were to rise by more than 7 per cent, those classed as "rural families", "disadvantaged fringe" and "battling urban" would be most at risk of default.
On a state-by-state analysis of mortgage sensitivity, Mr North found that - from a loan value perspective - households in NSW were most sensitive to rate changes, with more than 20 per cent of the mortgage value being potentially impacted should there be an interest rate rise of less than 0.5 per cent.
Mr North concluded: “Our household segmentation models highlight that from a value perspective, young affluent and exclusive professionals have a disproportionally large share of value, and a significant proportion of this would be at risk from even a small rise…
“[I]t is essential to look at the mortgage portfolio both from a value and count perspective. But in fact, it is the value-related lens which provides the best view of relative risk. This is how risk capital should be allocated."
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.