RBA finds 5pc of mortgage borrowers spend more than they earn, but not worried about default risks

RBA finds 5pc of mortgage borrowers spend more than they earn, but not worried about default risks
  • PublishedDecember 8, 2023

Speaking at a Sydney University banking conference, the RBA’s head of financial stability Andrea Brischetto said the bank’s internal research showed most borrowers could afford their mortgage at current interest rates.

“While just over 20 per cent of borrowers are estimated to spend more than 30 per cent of their income on mortgage payments, a much lower share — at around 5 per cent — is estimated to find their income insufficient to cover their mortgage payments and essential expenses,” she said.

That estimate is based on RBA staff calculations using a dataset of 1.8 million mortgages, which is around a third of outstanding home loans, along with estimates of essential spending based on the Household Expenditure Measure.

Ms Brischetto said most of the group spending more on essentials than they earn have savings to draw on.

“We know from the securitisation data that most of the 5 per cent of variable-rate owner-occupier borrowers who we estimate to have an income shortfall have substantial savings buffers,” she observed.

“That is, they have sufficient savings in their mortgage offset and redraw accounts to finance their income shortfalls for some time. This gives them time to explore their options.”

That leaves less than 2 per cent of mortgage borrowers who are spending more than they earn and have less than six months of savings to cover that shortfall.

Unemployment increase won’t trigger mass defaults

Ms Brischetto said even a sharp rise in unemployment would not drastically alter those numbers.

“Even if the unemployment rate were to increase by 2 percentage points (around three to four times as sharply as projected in the November 2023 Statement on Monetary Policy), the share of borrowers at risk of running out of savings buffers over the next year or so would likely remain at low single-digit levels,” she added.

The senior RBA official also pointed out that, with housing prices where they are now, the vast majority of struggling borrowers would be able to pay off their loans by selling, with much less than 1 per cent of loans currently in negative equity.

“In the event a household becomes unable to continue servicing their loan, this gives them the option of selling their home and repaying their loan,” she argued.

“While very disruptive and with real-life costs for affected households, this protects both them and their lender against default.”

However, while sanguine about risks for mass defaults on home loans and potential losses for the banking sector, Ms Brischetto did acknowledge the financial stresses faced by a large number of households.

“Wednesday’s national accounts showed how inflation, tax and interest rates have weighed on real household disposable income,” she said.


Leave a Reply

Your email address will not be published. Required fields are marked *