How are borrowers feeling at peak cash rate?

The Reserve Bank of Australia’s (RBA) most recent monetary policy decision on 6 February saw the central bank continue to hold the official cash rate steady at 4.35 per cent. Economists believe this to be the peak of the current cycle, with the next moves likely to be rate cuts expected in the second half of the year.

Although the peak has likely been realised, recent emerging data has suggested that borrowers are still feeling stressed in terms of repaying their mortgages, despite the majority still being able to do so.

For example, the latest Consumer Sentiment Tracker survey conducted by Finder has revealed that over one in three mortgage holders (35 per cent) indicated that they are struggling to pay their home loans as of January 2024. According to Finder, this is the equivalent of 1.1 million households.

Although this is down from the 41 per cent in June 2023, this is an increase on the 24 per cent in January 2022, a few months before the Reserve Bank of Australia (RBA) began its monetary policy tightening cycle.

Home loans specialist at Finder, Richard Whitten, said that Australian borrowers are “experiencing financial stress due to the fact that their monthly mortgage repayments have blown out so rapidly”.

In addition, the latest data on mortgage stress released by Roy Morgan found that 30.3 per cent of mortgage holders were “at risk” of mortgage stress in the three months to December 2023, representing the highest level of stress for the three-month period as the RBA’s rate hikes continued to flow through to borrowers.

However, PropTrack senior economist Eleanor Creagh said it can be difficult to measure mortgage stress as it lacks an “official” qualitative definition.

Ms Creagh noted that mortgage arrears still remain at historical lows and well below pre-pandemic levels, with data from the Australian Prudential and Regulation Authority (APRA) revealing that the non-performing share of loans currently sits at 0.78 per cent.

Furthermore, the share of loans 30–89 days past due sits at 0.54 per cent, according to APRA.

“While arrears remain historically low, there has been an increase in the share of mortgages that are between 30 and 89 days behind on repayments, indicating that a small but rising share of borrowers are likely in the early stages of financial stress,” Ms Creagh said.

The RBA previously estimated that around 95 per cent of variable-rate owner-occupier borrowers still have income to spare after their mortgage repayments and essential expenses.

And while 20 per cent of borrowers spend more than 30 per cent of their income on mortgage payments, only 5 per cent found their income to cover both mortgage payments and essential expenses.

Of that 5 per cent, however, the RBA estimated around 3 per cent maintain large savings buffers, leaving less than 2 per cent at higher risk.

Further research from Finder also revealed a “worrying” trend from refinancers as 18 per cent of refinancers said they extended their home loan length when they switched lenders in order to bring down monthly repayments.

According to Finder, this has extended loans by 3.5 years for the average refinancer.

“A common reason customers look to refinance is to reduce their repayments, often by extending their loan term back to 30 years,” Mr Whitten said.

“Mortgage holders are looking to free up some spare cash, but it could be a much more expensive option long term.”

However, he warned home owners to “tread carefully” when refinancing.

“Review your existing home loan to make sure you’re not paying more than you need to – and pay attention to what your lender is offering new customers,” he added.

“Try to negotiate it down with your current lender, but also remember to look at what rates other lenders offer because you may find a better deal.”

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