Interest Rates Up, Spirits Down: the real story about mortgage stress

Key takeaways

What's really happening with mortgage stress.

Remember all those predictions of a mortgage cliff and lots of distressed selling?

Despite rising interest rates over the last couple of years, and all the talk about mortgage stress, to date households have prioritised their repayments and there is little evidence of mortgage arrears or motivated selling.

Fundamentally anyone who wants a job has a job, and with further rate rises unlikely we're not going to see many distressed sales

What's really happening with mortgage stress?

Remember all those predictions of a mortgage cliff and lots of distressed selling?

There is no doubt that rising interest rates and inflation have created a substantial squeeze on households with mortgages, nudging many to recalibrate their budgets.

Yet despite rising interest rates over the last couple of years, and all the talk about mortgage stress, to date households have prioritised their repayments and there is little evidence of mortgage arrears or motivated selling.

However consumer confidence is very low.

Westpac's January consumer sentiment survey illustrates a dip in consumer confidence, reflecting financial anxiety in the wake of significant interest rate hikes since May 2022.

The sting of rising interest rates has been particularly sharp for Australian homeowners.

With borrowing costs climbing steeply — outstripping any income growth — mortgage payments now consume a larger slice of disposable income.

To manage, many households have either significantly tightened their belts or dipped into their savings while keeping up with their mortgage obligations.

This tightening of household spending is one of the mechanisms through which the RBA aims to temper demand and ease inflation.

What about mortgage stress.

So far, the commitment to mortgage repayments hasn't wavered, with scant signs of distressed sales despite many commentators, still suggesting huge levels of "mortgage stress."

Of course, the notion of 'mortgage stress' — the struggle to meet home loan repayments — remains difficult to quantify, with no standardized definition.

A survey from Finder sheds light on this, indicating over one-third of Australian mortgage holders (35%) — or about 1.1 million households — felt the pinch of their home loan payments in January.

This figure is down from June 2023's peak of 41% but up from 24% in January 2022.

It's important to note that these are subjective measures of stress.

While many households feel the crunch of heightened servicing costs and have adjusted their spending accordingly, they continue to meet their mortgage commitments.

Thus, the 'official' data on mortgage stress, which focuses on delinquent payments, paints a less dire picture.

Arrears, despite being reported with a delay, are historically low, well under pre-pandemic figures.

Employment remains a crucial factor for homeowners in meeting their mortgage obligations.

The labor market's resilience and the persistently low unemployment rate have been a buffer, enabling many households to continue servicing their mortgages, sometimes by increasing work hours.

But for those in precarious employment, with scant savings, or facing adverse life events, the story might differ.

Despite the adjustments in spending, households generally prioritize their mortgage payments, either by cutting back elsewhere, working more, or utilizing savings.

Thus, the 'official' data still reflects low levels of distress.

It should be noted that many borrowers struggling with higher payments aren't reflected in the non-performing loans statistics because lenders often work with them to avoid foreclosures.

Similar to the pandemic's repayment holidays, lenders' hardship teams strive to offer solutions through loan restructuring, such as extending the loan term, switching to interest-only payments, or pausing repayments temporarily.

If such measures don't suffice, selling the property remains an option for most.

Given the recent property price surge, the incidence of 'negative equity' is minimal (0.1% of outstanding loans, per RBA data), though this could shift if property prices fall significantly.

While such sales don't figure into 'stress' statistics, they do carry tangible costs for the households involved.

While arrears remain low, there's a slight uptick in mortgages falling behind by 30 to 89 days, suggesting a small but growing segment of borrowers might be entering financial distress.

Providing unemployment doesn't spike unexpectedly, it's likely borrowers will keep prioritizing their mortgage payments, reining in non-essential spending — a trend that's already making waves in the economy.

Therefore, while some rise in arrears from current levels is probable this year, the overall rate is expected to stay low.

For those households contending with budgetary adjustments, there's a silver lining: interest rates seem to have topped out.

The economy is poised to continue its moderation, as the full effect of monetary tightening is still unfolding, coupled with the challenges of high inflation and rising tax liabilities. Consequently, inflation should keep trending downward.

With further rate hikes appearing unlikely in this cycle, mortgage repayments may not climb higher, but households will likely still feel the financial squeeze due to inflation, increased taxes, and the existing higher rates impacting disposable income.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.