Over 1 million mortgage borrowers likely to fall under stress — study

The mortgage stress levels among Australian borrowers could rise to its highest since 2013 if the Reserve Bank of Australia (RBA) hikes the interest rate by 100 basis points over the next two months.

Roy Morgan’s latest research found around 20.8% of mortgage holders or around 942,000 borrowers are currently classified as "at risk", following the consecutive rate increases that started in May.

This is the highest share of mortgage holders considered “at risk” since May 2019.

Mortgage holders are considered “at risk” when they spend more than 45% of their after-tax income on their home loan repayments, based on the standard variable rate and the amount they initially borrowed.

If the RBA makes two more 50bps hikes in October and November that would bring the cash rate to 3.35%, this share might increase to 24.3%, equivalent to 1.1 million borrowers. This would be the highest mortgage stress level since 2013.

Roy Morgan CEO Michele Levine said the current mortgage stress level remains below long-term averages despite the five consecutive months of upswing.

“As of today, the official interest rate is at the highest it has been for over seven years since early 2015 — even so, with just over one-in-five mortgage holders considered ‘at risk’, the level of mortgage stress is still below the long-term average over the last 15 years,” she said

The long-term average share of mortgage holders considered “at risk” is 22.7%.

The current mortgage stress level also remains significantly lower than the level seen during the Global Financial Crisis, when 35.6% of mortgage holders, representing more than 1.4 million borrowers, were considered “at risk”.

The number of borrowers who fall under the “extremely at risk” category would also rise if rates are increased by another 100bps over the next two months.

By September, 14.1% of home loan borrowers, or around 620,000, are considered “extremely at risk” — this figure could potentially rise to 15.4% in October (681,000) and 16.7% in November (734,000).

“Extremely at risk” borrowers are paying more than a certain share of their after-tax income into their home loan, based on the standard variable rate and the amount now outstanding on their home loan.

While rate rises bear a significant weight on how mortgage stress levels behave, other factors can heavily influence where this level would go.

“The variable that has the largest impact on whether a borrower falls into the ‘at risk’ category is related to household income – which is directly related to employment,” Ms Levine said.

“These figures suggest that as long as employment levels remain strong the number of mortgage holders considered ‘at risk’ will not increase to anywhere near the levels experienced during the GFC when well over 30% of mortgage holders were considered ‘at risk’.”

Are borrowers really struggling with repayments?

A separate analysis by PropTrack economist Paul Ryan looked at mortgage stress in terms of the share of non-performing loans, or those that are 90 or more days behind on repayments.

“Direct comparisons are difficult, but the number of people behind on their mortgage is currently very low, both compared with history and other countries. There has also been a decline in the share of mortgages that are between 30 and 89 days behind on repayments,” he said.

Data from the Australian Prudential Regulation Authority covering the June 2022 quarter showed that the share of non-performing loans in the overall mortgage lending portfolio declined to 0.78%.

Meanwhile, the share of loans 30 to 89 days past due went down to 0.40%.

Mr Ryan said most stress is caused by a loss of income.

“The current unemployment rate – the lowest in almost 50 years – means most households can keep making mortgage repayments, even as other costs mount. But that could change,” he said.

Mr Ryan said most borrowers are well-placed to absorb additional costs, especially given that they are assessed using the serviceability buffer of three percentage points higher.

“The overwhelming majority of borrowers will be able to withstand these budgetary pressures. While not in stress, the required spending adjustments will almost certainly be difficult for many,” he said.

“But interest rates will increase further – markets expect an additional 1.5 percentage points – which would push rates beyond the level recent borrowers have been assessed against.

“Even then, only borrowers who borrow close to their maximum might be in a position of stress, since others – by definition – have spare income to make higher repayments.”

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