Should over-extended households pay down their debts?

With national housing prices softening and regulators continuing their clampdown on riskier home loans, many prospective homebuyers are wondering if it will be harder to secure a home loan this year.

As for current mortgage holders, many are wondering if they’ll face greater pressure to pay down debt while interest rates are still low. 

There will undoubtedly be consequences for the broader economy if a significant portion of household income is being funnelled into reducing debt, as this will detract from general spending.

Based on the forecasts of most economists, mortgage holders have between nine and 18 months of the current record low interest rates before the central bank will begin the process of moving rates up.

Encouraged by the growth in dwelling values, the household debt held by Australians has more than doubled over the past 12 years—with nearly 30% of households now considered to be over-indebted, according to a recent report from the Australian Bureau of Statistics (ABS). 

Also read: Australian households reeling from mortgage stress

The Australian Prudential Regulation Authority (APRA) has implemented measures to curb the growth in investor and interest-only loans. This, in turn, has pushed lenders to give more favourable interest rates to owner-occupiers and principal-and-interest borrowers.

Considering recent developments, this year will likely see regulators implementing measures to ensure that over-extended households are paying down their debts.

APRA implemented the first of its macro-prudential measures in 2015; however, their impact was offset when the Reserve Bank dropped interest rates twice. The regulator’s second attempt last March was far more successful at limiting riskier home loans. 

“We are likely to see lower to negative growth rates across previously strong markets, more cautious buyers and ongoing regulator vigilance of credit standards and investor activity [this 2018],” said Tim Lawless, head of research at CoreLogic.