‘Mortgage stress’ highest since pre-pandemic

There are signs that financial stress caused by higher mortgage debt and rising interest rates has started to show.

An estimated 22.6 per cent of mortgage holders (1,013,000) were ‘At Risk’ of ‘mortgage stress’ in the three months to October 2022, up from 21.1 per cent last month, new data from the Australian research company Roy Morgan revealed.

This took the figure to just below the long-term 15-year average of 22.8 per cent. 

This period included two interest rate increases of 50 bps (August and September), followed by a 25-bp bump in October, which took the official interest rate to 2.6 per cent in October, marking the highest official cash rate since August 2013.

Since then, November’s 25-bp increase took the cash rate to 2.85 per cent and is widely expected to increase again for an eighth straight month in December.

The number of mortgage holders considered ‘Extremely At Risk’, has now increased to 619,000 (14.4 per cent) in the three months to October 2022 but remained below the long-term average of 15.9 per cent.

In addition, the proportion of mortgage holders considered ‘At Risk’ of mortgage stress remained well below the high reached during the global financial crisis in early 2009 of 35.6 per cent (1,455,000 mortgage holders).

Mortgage holders are considered ‘At Risk’ if their mortgage repayments are greater than a certain percentage of household income and are considered ‘Extremely at Risk’ if the ‘interest only’ is over a certain proportion of household income.

The increase in stress followed government stimulus and banks’ support to mortgage borrowers, seen during the pandemic, on the back of record low interest rates.

Chief executive Roy Morgan, Michele Levine, said mortgage stress in Australia is set to increase to over one-in-four mortgage holders if the RBA raises interest rates for an eighth straight month in December.

“The rising inflation level in Australia, and all the indications from the RBA, suggest interest rates will increase again in December by either +0.25 per cent, +0.40 per cent or perhaps +0.50 per cent,” Ms Levine said.

Roy Morgan data revealed if the Reserve Bank of Australia (RBA) chose the lower option to raise interest rates by 25 bps, it would place 25.1 per cent of mortgage holders ‘At Risk’ of mortgage stress.

An increase in the cash rate of 40 bps to 3.25 per cent would see 25.3 per cent (up 2.7 per cent points) of mortgage holders, 1,132,000, considered ‘At Risk’ in January 2023, while a 50-bp increase would see 25.4 per cent of mortgage borrowers ‘At Risk’ of mortgage stress.

“Roy Morgan forecasts that mortgage stress is set to increase to over 25 per cent of mortgage holders considered ‘At Risk’ by January 2023 — well over 1.1 million mortgage holders,” Ms Levine said.

“It’s important to consider that interest rates are but one variable … 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.

“These figures show 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 Global Financial Crisis in 2007–08–09.”

New cohort of borrowers to feel mortgage stress

Credit bureau Equifax’s recent analysis into mortgage accounts revealed “a new cohort of Australians” experiencing post-pandemic financial stress who fall outside the traditional definition of financial hardship.

The data found despite having “strong credit profiles”, this group, made up primarily of younger Australians (under 45), who bought into the housing market at the peak of the pandemic are now starting to show signs of stress.

“They have high levels of indebtedness and they haven’t yet built equity,” Equifax said.

“They have rising amortised limits and have now reached out to their lender but were up to date previously.”

While overall mortgage arrears (30+ days past due) are still sitting below pre-pandemic levels (at 0.5 per cent), Equifax data showed an increase of 17 per cent in the number of accounts requiring assistance over the last six months.

“This brings the number of mortgage accounts requiring assistance today (post-COVID-19) to double the number pre-COVID-19,” the data found.

Indeed, for this group of Australians, early intervention is crucial, such as educating borrowers on their options to meet mortgage repayments.

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