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By Brett Warren

Australian borrowers remain resilient in mortgage repayments despite rising rates

We haven't fallen of the "fixed rate cliff "and we're not getting a load of forced or distressed property sales.

The resilience of household borrowers in the face of surging interest rates has surprised Reserve Bank researchers.

In fact most Australian households have successfully manage increased mortgage repayments, according to the recently published Financial Stability Report (FSR) from the RBA.

The report noted that:

"The vast majority of households continue to service their debts and lenders in the Bank’s liaison program have reported that borrowers have been more resilient than expected in their ability to service their debt, given the sharp rise in interest rates."

The RBA found that while most Australians remain well placed to manage the ongoing impacts of high inflation and higher interest rates, 5 per cent of owner-occupier households are exceeding their income when it comes to mortgage repayments and essential expenses.

It seems Aussie households tend to find a way to adjust their lifestyles and modify their living standards to make sure they service their mortgages, but obviously, there are limits to everything.

The RBA said those borrowers were not necessarily in mortgage stress but would likely have to either draw down further on their savings, restructure their loans or consider cheaper education and health insurance options.

Tapas Strickland, NAB's Head of Market Economics explained

"Currently, around 5%  of variable-rate owner-occupiers have essential expenses and mortgage costs exceeding income, but “about 70% of these borrowers have sufficient savings in their offset and redraw accounts to finance their cash shortfalls for at least six months”.

Mortgage Rate Outstanding Lending

Estimates Of Borrowers With Cost Of Living Exceeding Income

Fixed-rate borrowers rolling off exhibit similar behaviour to variable-rate borrowers

The report explains that the resilience of households to the rise in interest rates that has seen scheduled mortgage payments rise by around 30-50% for variable-rate borrowers is due to:

  1. the strong labour market with some increasing hours of work, as well as receiving additional income through overtime or cost-of-living bonuses;
  2. many households curtailed discretionary spending;
  3. some households have been able to draw down on the large savings buffers they accumulated during the pandemic.


Growth In Earnings By Quintile

Balance Weighted Share Of Loans By Type


Most borrowers would be able to cope

Hypothetical scenario suggests most borrowers would be able to cope after a further 50bp rise in the cash rate, at least in the short term.

Strickland noted that for markets, perceived household vulnerabilities are not limited to a further rise in the cash rate if needed to get inflation back to target.

The FSR modelled what the effect would be of a hypothetical 50bp increase in the cash rate to 4.6%.

The result was that “the estimated share of variable-rate owner-occupier borrowers who are unable to meet to cover their expenses (using the baseline HEM) would rise from around 5 per cent to around 7 per cent”.

About 70% of these would have sufficient financial buffers for at least six months.

Mortgage Buffers Relative To Cashflow Shortfalls

He also highlighted that the vast majority of borrowers have substantial equity in their houses.

The FSR notes that

“only around 0.1 per cent of loans (0.15 per cent of loan balances) are in negative equity at current housing prices. These shares would increase to around ½ a per cent if housing prices were to fall by 10 per cent from their July levels”.

Outstanding Lvr Distribution

On the banking system, Strickland further commented:

"The FSR notes arrears rate remain low – banks non-performing loans have increased slightly in recent quarters but remain near decade lows and the main risk to this would be from a large negative shock to employment….historically, increases in unemployment have been associated with rising NPLs in Australia.

On the TFF, the RBA assess  the remaining TFF repayments are unlikely to pose a significant challenge for the banking sector overall."

Banks Non Performing Loans

A final note...

In simple terms, the big takeaway from the Financial Stability Report is that despite interest rates going up quite a bit, most households are handling it well without causing problems for the economy.

If the need arises, the report suggests that even higher interest rates won't necessarily harm financial stability.

In short, it looks like people can handle these higher rates for a while.

Interestingly the NAB think the Reserve Bank might increase interest rates in November to 4.35%.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.
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