RBA reveals how mortgagors are faring

The Reserve Bank of Australia (RBA) has evaluated the state of Australia’s mortgage health, revealing increasing pressure on Australian households with mortgages.

During a conference in Sydney, Andrea Brischetto, the head of financial stability at RBA, acknowledged that many households were facing substantial financial pressures due to high inflation and rising interest rates.

As 2023 nears its end, concluding the year with a cash rate of 4.35 per cent has placed pressure on mortgage holders, particularly variable-rate mortgagors.

“The majority of mortgagors – except those still on low fixed rates – have seen their minimum scheduled payments increase between 30 and 50 per cent since the first increase in the cash rate in May 2022,” Ms Brischetto said.

“These borrowers are more likely to have experienced a sharper increase in budget pressures than the overall population.”

The RBA estimated that approximately 95 per cent of variable-rate owner-occupier borrowers still have spare income after meeting their mortgage payments and essential expenses.

Meanwhile over 20 per cent of borrowers spend more than 30 per cent of their income on mortgage payments, with a significantly lower share – around 5 per cent – finding their income insufficient to cover both mortgage payments and essential expenses.

However, the RBA reassures that among the 5 per cent of variable-rate owner-occupier borrowers estimated to have an income shortfall, around 3 per cent maintain substantial savings buffers, leaving fewer than 2 per cent at higher risk.

RBA data indicated that less than 2 per cent of all variable-rate owner-occupier borrowers have both an income shortfall and low savings buffers, potentially falling into severe financial stress within six months.

While borrowers rolling off fixed-rate loans are likely to see similarly sized increases in their mortgage costs as those experienced by variable-rate borrowers, they have also avoided higher loan payments for longer.

Despite the heightened risk, the majority of borrowers continue to monitor Australians’ savings buffers, noting the majority have sufficient savings in their mortgage offset and redraw accounts to manage their income shortfalls for a considerable period.

Australia’s financial instability risks

The RBA continues to have a close eye on Australia’s mortgage market, given that housing loans constitute nearly half of Australian banks’ exposures.

As such, financial stress among indebted households could directly impact financial stability, with adverse consequences for the broader economy and households.

“However, most borrowers have been resilient and even in the case of an economic downturn, this is likely to remain the case,” Ms Brischetto said.

She explained that households entering severe financial stress often do so suddenly due to a disruptive event, such as illness or job loss, while in other cases, financial stress may arise more gradually.

Indebted households may seek temporary hardship assistance from their lenders or, as a last resort and at high personal costs, reduce or repay their debt by selling assets, including their family homes.

Consequently, the resilience of indebted households is bolstering the stability of the Australian financial system, the RBA observed.

Nonetheless, budget pressures are being widely felt across households, impacting consumption patterns.

Many households have adjusted their consumption habits, with some experiencing severe financial stress – struggling to meet even the most basic expenses – but this is currently limited to a smaller group.

“We know that high inflation and higher interest rates have reduced households’ spare income,” Ms Brischetto said.

“High inflation and higher interest rates have diminished households’ spare income,” echoing governor Michele Bullock’s recent remarks on the challenges inflation poses to the economy.

“High inflation not only erodes savings and hurts household budgets but also complicates business planning and investment while exacerbating income inequality.”

Additionally, households have altered their savings behaviours. After saving more than usual during the pandemic, households are now saving less than the pre-pandemic average.

“These adjustments have meant that, to date, the substantial pressure on households’ budgets has not translated into a sharp increase in late-stage financial stress,” Ms Brischetto said.

“Both loan arrears and personal insolvencies (business-related and other) have increased from their low levels during the pandemic, but most households continue to be able to service their debts.”

However, consumer sentiment for owner-occupiers has declined significantly to an index below 80 in early 2023, persisting below levels seen above 115 in mid-2021.

[Related: Inflation twice as heavy on low income cash flow: Bullock]