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By Michael Yardney

Stop talking about mortgage stress

It’s time that we all stopped talking about mortgage stress.

It’s been a hot topic over the last year and a half, following a spate of interest rate hikes by the Reserve Bank propelling mortgage rates to heights unseen since late 2011.

There's no denying that some first-time homeowners who capitalized on record-low interest rates offered during Covid and bought property at the peak of the market in late 2021 are now moving onto a new variable interest rate higher than the buffer applied by their lender when they took out the loan.


But let's pause and consider the bigger picture: the notion of 'mortgage stress,' emblematic of a struggle to meet mortgage repayments, is not the ubiquitous predicament it's often made out to be.

Similarly, the dreaded "fixed rate mortgage cliff" — where the hordes of mortgage holders who ‘‘fixed’’ in the low rate Covid period would battle to pay freshly elevated monthly bills – has also failed to materialise.

Here’s what happened to the forewarned “mortgage cliff”.

Interestingly National Australia Bank says this riskiest cohort of customers - the ones breaching their serviceability buffers - are not showing any more signs of mortgage stress than the rest of its home loan book.

In fact, at its full-year results, the bank revealed that while there has been a concern for much of the year that some borrowers on high-risk loans would fall over the so-called “fixed rate mortgage cliff” as their fixed rates reset, this just hasn’t materialised.

“To date, early arrears trends for loans originated during a period of low-interest rates, the 2020 and 2021 vintages, are not dissimilar to earlier vintages,” the bank said in its presentation slides.

Is this further proof that the ‘mortgage stress’ and ‘mortgage cliff’ drama have been overplayed?

Maria Trinci, a financial services partner at KPMG told the Australian that the major banks have reported a modest rise in arrears, which suggests that interest rate rises and the erosion of savings buffers may be starting to impact consumers.

"However, this rise ­remains small and from a record low base, demonstrating the resilience of Australian consumers."

In fact, mortgage stress metrics across all major banks are still lower than pre-pandemic levels.

Each year the banks release results reporting an impending drama where mortgage holders are expected to fold under the pressure of higher rates.

This time last year, The Australian reported, "a yawning gap between the hard numbers and the gloom and doom among forecasters", for example.

These borrowers have managed to accumulate additional savings or pay off more of their mortgage during ultra-low rates.

And those who have faced a stickier transition to higher variable rates have been helped by strong competition between lenders undercutting each others’ rates to win customers who are refinancing.

At the same time, the Reserve Bank’s 4-month pause on its interest rate hikes has helped mortgage holders catch up with rising inflation.

Mortgage Stress

Household stress might be a more accurate term

Maybe 'household stress' is a more apt descriptor?

While it’s clear that the dreaded mortgage cliff or mortgage stress isn’t materialising in the way we all dreaded, there is still obviously an element of financial stress among households.

Especially after the latest interest rate rise.

Australians are clearly struggling with surging interest and the general increase in the cost of living.

And they’re cutting back on spending to compensate.

But they’re not facing mortgage default.

But while the rates of delinquency and arrears have risen on mortgages, they are still below where they were a few years ago.

And while this isn’t a sign of impending doom, but rather a sign that the disaster was never really coming.

Nonetheless, we're not entirely out of the woods.

Research from the RBA indicates some younger mortgage holders are experiencing what is traditionally recognized as mortgage stress.

The Australian National University's tax and welfare model predicts that by the end of the year, nearly half of all borrowers will be allocating over 30% of their disposable income to mortgage repayments — a significant jump from pre-Covid figures.

Fitch Ratings also reported a modest rise in 30+ day mortgage arrears, up to 1.12% in the third quarter of 2023.

Mortgage Stress

A final note...

The key takeaway here is that despite interest rates going up significantly, most households are handling it well without causing problems for the economy.

If the need arises, it appears that even higher interest rates won't necessarily harm financial stability, with the risk of defaults still a fair way off in the distance.

In short, it looks like most mortgage holders can handle these higher rates for a while.

And we’re not seeing hordes of distressed property sales from desperate vendors and there are very few mortgagee sales

This is promising news given another interest rate rise is possible in the future.

About Michael Yardney Michael is a director 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.

It’s still way too early for the fixed rate cliff to have had much of an impact. Give borrowers a year at the higher level of repayments to really see the impact. I’m thinking the second half of 2024 will be tough for many, although that might be t ...Read full version

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