Almost half of Australia’s mortgage holders are in financial stress even before an expected Melbourne Cup day interest rate rise goes ahead, paying at least 30% of their income to service their loans.
Households diverting at least 30% of their disposable income to service a mortgage – a standard stress gauge – will account for 48.5% of total borrowers by the end of the year, according to the Australian National University’s Australian tax and welfare system model.
The proportion rose from 26.7% in pre-Covid 2019 to 43.8% at the end of last year, and easily topped the 38.5% share of households in 1993, to be at record levels.
The ANU projection does not incorporate the Reserve Bank of Australia lifting its cash rate by another 25 basis points to 4.35% at either Tuesday’s board meeting or the final one of the year on 5 December.
All but four of 39 economists surveyed by Reuters tip an increase will happen at the central bank’s Melbourne Cup Day gathering on Tuesday.
Such a move would be the 13th increase in the cycle that began in May 2022 and hoist the cash rate to its highest level since late 2011.
Those on a typical mortgage can expect to see repayments increase about $15 a month for each $100,000 borrowed if the quarter-point increase happens, RateCity said.
This means a family with a $500,000 mortgage will pay an extra $1,210 a month since the cycle of hikes began.
“There’s no doubt that there are many people who are paying a pretty high amount of their income on housing costs,” said Ben Phillips, principal research fellow at ANU’s Centre for Social Research and Methods. “And that’s a concern.”
Financial markets, though, were betting on about a 50:50 chance of another rate increase to 4.6% by next June.
The bottom 40% of income earners who also had a mortgage were likely to be the segment of borrowers facing the tightest pinch of higher debt-servicing costs, Phillips said. The share of mortgagors in this category was 10.1% at the end of 2019 and will rise to 14.4% come the end ofthis year, he said.
“Most [mortgagors] will be middle- or higher-income households,” Phillips said. “So that’s why the number is much lower and why it doesn’t increase quite as dramatically” as the overall mortgagor tally.
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Financial authorities and commercial banks – including Westpac on Monday – are yet to report a significant upswing in troubled loans. That’s even though variable interest rates have jumped from a record low of about 2.5% to about 6% in just over a year.
Phillips says it’s not clear where the financial breaking point for borrowers lies. On average, the share of households’ disposable income going on debt repayments will reach 27.6% by the end of next month, up from 20.2% in 2019, even without another rate rise today, the data shows.
“It still remains the case of [loan] defaults and arrears are pretty low,” he said, with only a slight increase evident so far. Households were “just rearranging their affairs and doing everything that they can to keep the mortgage payments being paid”.
The result was taking “a bit of heat out of the economy”, which was the RBA’s aim, he said.
But separate analysis of demand for credit cards and personal loans suggests cost-of-living pressures are hitting some households as they struggle to stay afloat.
Credit card demand was up 6.9% in the June quarter of this year compared with the same period in 2022, and personal loan applications were up 8.2%, according to Equifax, a global data group.
Relying on unsecured credit to make ends meet was not a viable long-term strategy for consumers who were feeling financial strain and could create bad debt cycles if they couldn’t keep up with repayments, according to Kevin James, an Equifax general manager.
“Late delinquency rates for credit cards are at their highest since 2021, with the number of accounts in 90-plus days past due arrears up 19% year-on-year,” James said, citing consumers aged 31-40 reporting the higher arrears in August.
“For mortgages, acceleration in early delinquency continues from last quarter. The number of accounts in arrears 30-90 days past due is 47% higher than 12 months ago.”
For commercial borrowers, insolvency rates increased by 11% in September from a year ago, and were up 128% from two years earlier, Equifax said. The construction industry recorded the largest share of insolvencies at 11.8% of all cases recorded.