Interest rates have likely peaked, so how stressed are borrowers?

Eleanor Creagh
Eleanor Creagh

Rising interest rates have put a lot of pressure on Aussie households with a mortgage, as increased borrowing costs greatly outpaced any increase in incomes.

Many households have likely had to undergo substantial budgetary adjustments or dip into savings as they continue to service their mortgage.

To date, those households have prioritised their repayments and there has been little evidence of a pickup in motivated selling.

But what about mortgage stress?

Mortgage stress is when a household struggles to afford their home loan repayments, however it is hard to measure and lacks an “official” quantitative definition.

A recent survey from Finder has revealed more than 1 in 3 Aussie mortgage holders (35%) – equivalent to 1.1 million households – felt stressed about paying their home loan in January. That percentage is down from a record high of 41% in June 2023, but up from 24% in January 2022. 

These survey responses are a qualitative measure of “stress” and while many households are feeling stressed with the sharp increase in servicing costs, they continue to be able to service their mortgage.

As a result, official data that attempts to capture mortgage stress paints a less concerning picture of those who are behind on their mortgage repayments.

Data suggests few are falling behind in payments

Mortgage arrears, albeit published with a lag, remain historically low and well below pre-pandemic levels. 

For many households with a mortgage, having a job is fundamental to their ability to service that mortgage.

The resilience in labour market conditions and low unemployment rate has provided a safety net here and is a driver of why mortgage arrears remain historically low, having helped households continue to service their mortgage, with some even increasing their hours of work.

But for those with insecure work arrangements, small savings buffers, or who suffer unfortunate life circumstance, the picture may be different.

So while many households may be feeling stressed with the spending adjustments they have made, they have continued to prioritise their repayments by reducing spending elsewhere, increasing hours worked or drawing on existing savings.

Strong employment has allowed most borrowers to continue making repayments. Picture: Getty

This has meant official data still captures low levels of stress.

In addition, many borrowers who struggle with higher mortgage repayments do not end up recorded in these non-performing loans data.

That’s because for the small number of borrowers who find themselves devoid of safety nets and with low savings buffers, lenders will cooperate to avoid mortgagee selling.

Just as repayment holidays were offered through the pandemic period, lenders have dedicated hardship teams that will attempt to find a solution via potential loan restructuring options, such as longer loan terms, interest-only periods, or temporary repayment suspensions.

Households unable to cope can likely sell for a profit

In the event these measures fail, almost every household with a mortgage has the option to sell their property and repay their loan in entirety.

After the substantial price rises of recent years the share of loans in ‘negative equity’ is negligible at just 0.1% of loans outstanding according to RBA data, and well below pre-pandemic levels, although this could change if house prices fall sharply.

This is of course, disruptive, with real-life costs for affected households, despite not being captured in stress measures.

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. 

Provided the unemployment rate does not rise by a lot more than it is expected to do so, most borrowers are likely to continue prioritising their repayments and dial back discretionary spending – a dynamic we are already seeing and feeling in the economy.

As a result, while there is likely to be some increase in arrears off current low levels this year, overall arrears are expected to remain low.

For households who have struggled with spending adjustments, the good news is interest rates have very likely peaked.

But while further rate rises are unlikely in this current tightening cycle, households will continue feeling the pinch given the impacts of inflation, higher income tax payments and higher interest rates on disposable incomes.

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