Borrowers continue to service debts on time: RBA

The latest Financial Stability Review – March 2024 released by the Reserve Bank of Australia (RBA) has revealed that while elevated inflation and interest rates have put household budgets under pressure, “nearly all” borrowers are still able to service repayments on time.

The RBA noted that although housing and personal loan arrears have increased since late 2022, they still remain below pre-pandemic levels, however, the central bank has noticed a rising share of borrowers requesting temporary hardship arrangements from lenders.

In turn, this has contributed to arrear rates remaining “a little lower” than would have otherwise been the case.

Australia’s banks expect arrears to continue to rise but still remain at historical lows.

Indeed, Moody’s Investors Service recently flagged that the rate of mortgages in arrears is set to rise throughout 2024 as repayments have “significantly outpaced income growth”.

Moody’s data revealed that the share of prime-quality home loans in 30-plus day arrears increased to 1.62 per cent in December 2023, an increase from 1.45 per cent in September 2023 and 1.05 per cent in December 2022.

The arrears rate for non-conforming mortgages also rose to 3.91 per cent in December 2023, up from 3.39 per cent in September.

The RBA outlined several factors as to why households are still able to service their debts on schedule, which include the labour market remaining around record highs and households adjusting spending habits.

Additionally, most households entered this period in a “relatively strong financial position” with spare cash flows and larger savings buffers than pre-COVID-19, according to the central bank.

“This has provided room for households to adjust to higher inflation and mortgage costs, including by saving less and, in some cases, drawing on their existing savings buffers,” the board stated.

However, while arrears remain low, mortgage holders with low buffers and high leverage have been more likely to fall into delinquencies.

“Borrowers usually draw down on their savings buffers before falling behind on their loan payments,” the RBA stated.

“Those who start with low buffers or find it difficult to build up buffers are therefore more likely to fall behind on their loan payments.

“As a result, arrears rates are highest among highly leveraged borrowers (relative to their income or the value of their property).”

On the other hand, borrower groups that are oft considered more at risk have fallen into arrears at similar rates to the aggregate, according to the RBA.

These borrower groups include owner-occupiers who have rolled off a low fixed rate onto higher variable rates, partly due to the fact that this group was able to accumulate savings buffers over an extended period of historically low interest rates.

“Arrears rates are slightly lower than the aggregate among recent first home buyers, who borrowed within the past three years, including when interest rates were at their lowest; this is another group often considered more at risk,” the board stated.

“Arrears rates are similar across states and territories, consistent with solid employment conditions across the country.”

At this point in time, less than 1 per cent of all housing loans are 90-plus days in arrears, and less than 2 per cent of highly leveraged borrowers are in arrears.

[RELATED: Arrears to rise as repayments outpace income growth: Moody’s]