Households are managing mortgage debt comfortably at the moment and there’s a chance to stay ahead of any potential economic downturns.
The Reserve Bank of Australia’s (RBA) most recent Financial Stability Review – published earlier this month – paints a positive picture of household resilience. It also shows that most households would still be able to pay their mortgages and have equity left over in the event of a major economic downturn.
It’s promising news for Aussies, who have felt the pinch of higher living costs in the years since Covid and rode out tough times diligently before finally feeling some interest rate relief earlier this year.
The review shows housing debt is less than $3 trillion, while the total value of housing across the nation is $11 trillion, leading both the RBA and the Council of Financial Regulators to agree housing market risks are currently under control.
Despite this, concerns have still been flagged around how lending quality could deteriorate if interest rates continue to fall.
Households have become more prepared to take on additional debt this year, with rate cuts in February, May and August increasing borrowing capacities and boosting confidence. At the same time, new opportunities are opening up in the property market for buyers of all ability, thanks in large part to the government’s generous extension of the Home Guarantee Scheme. Under the new terms, buyers on any level of income are now able to enter the market with a 5% deposit.
The scheme, criticised by many, is expected to push competition in the strained housing market to a new high, ramping up home prices which are already at record levels.
While many investors and first-home buyers are expected to join regular sellers and buyers jostling for more space in the market, mortgage holders should consider the risks. Both the government and the RBA can be easily moved to tighten macroprudential and fiscal policy where needed if inflation rises further and pricing becomes unstable.
Naturally, highly leveraged borrowers - those with high loan-to-value or high loan-to-income ratios - are the most vulnerable when it comes to unexpected rate changes, which makes them the least resistant in the event of a downturn.
The review shows highly leveraged borrowers are still most likely to go into arrears; while this has declined over the last 12 months, there are more in arrears than before the pandemic.
With inflation risks having subsided over the course of 2025, Australian Bureau of Statistics national accounts data from September confirmed 2024-25 was the weakest financial year for growth in Australia since the early 1990s, excluding 2019-20.
Despite this, the data shows household spending has been on the rise, while Australians have taken advantage of the three rate cuts handed down.
Household wealth, contribution to growth, quarterly
The RBA cut 0.25% from the cash rate in February, May and August, with scheduled mortgage payments having fallen accordingly.
However, many households are still making extra repayments and even scheduled payments remain above pre-pandemic levels.
The RBA’s figures show the majority of households that have variable home loans have a buffer in their offset or redraw accounts. Mortgagors’ equity positions are also strong – the review confirms less than 1% of households are currently in negative equity.
On the other side, 0.7% of borrowers have a shortfall in cashflow and a pre-pandemic buffer of six months or less.
If rates do continue to fall throughout next year as is still forecast by the RBA, even less borrowers will have a shortfall as real wage growth is also expected to lift.
The RBA is also confident that unemployment will stabilise from its recent spike.
Could we be at the end of the RBA’s rate cutting cycle though? Australia’s largest home loan lender Commonwealth Bank certainty thinks so. National Australia Bank supports a similar prediction – that rates will be on hold until the middle of next year to help squeeze more growth out of the economy.
As the Australian economy fights to maintain momentum, the next shapshot of mortgage holder health from the RBA could paint a very different picture.
For now though, Australians appear on the whole to be in a sufficiently comfortable position.
