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This was published 5 months ago
Borrower beware: default risks linger despite interest rate hiatus
By Matt Wade
The number of home loan and credit card delinquencies is expected to rise in coming months even though interest rates have remained unchanged since November and cost-of-living pressures are easing.
Many borrowers remain at risk of default even though interest rates have stabilisedCredit: Natalie Boog
The risk of default for those with mortgages and credit cards rose late last year with stress most acute among borrowers in Sydney and Melbourne, analysis by credit bureau illion shows. Missed repayments on all types of loans were 25 per cent higher in the December quarter compared with a year earlier.
Barrett Hasseldine, illion’s head of modelling, said the threat of default was still “pronounced” for many borrowers.
“Over the last quarter of 2023 we saw the portion of credit cards that are delinquent go up 7 per cent, the portion of home loans that are delinquent go up 5 per cent and the portion of personal loans delinquent rose 2 per cent.
“We expect credit card and home loan delinquencies, in particular, to continue to rise throughout this first half of 2024.”
A barometer of credit stress is compiled by illion each quarter using credit and banking data from more than 18 million consumers.
It shows credit stress last peaked in the middle of last year following 12 interest rate increases by the Reserve Bank between May 2022 and June 2023. After improving in the second half of last year, credit risks began to intensify again in November and December.
Credit stress is most concentrated in Victoria and NSW.
Default risk for credit card holders in Victoria rose by 8 per cent in the year to December and by 6 per cent in NSW over that period.
Hasseldine attributes this to increased credit card use as the cost of living crunch hit households last year.
“About 12 months ago there was a large increase in the number of credit card applications, now we’re seeing that many of those new credit cards are falling behind on repayments,” he said. “It seems that households have used the credit card to be able to make ends meet and are now, in turn, finding it difficult to stay on top of all their credit card repayments.”
A Reserve Bank review of the financial system, released this month, said one in 20 home borrowers on variable interest rates had expenses that “exceed their income” as they struggle to meet mortgage repayments. Lower income borrowers are more likely to be in this group.
“Much of this year will remain challenging for borrowers already under pressure,” the RBA warned.
The illion analysis showed home loan stress was most pronounced in Victoria where the default risk was 10 per cent higher in the 2023 December quarter compared with the same period a year earlier. In NSW, the default risk for home loans was up by 1 per cent over that period.
Default risk among home borrowers was most pronounced in areas where loans were taken out relatively recently, especially outer mortgage belt areas.
Despite rising credit risk, illion says many consumers increased discretionary spending during the second half of last year, especially “stay at home” purchases on takeaway food, digital goods and streaming services.
“There’s a lot more online and remote purchases, consumers are staying at home and getting their entertainment and food that way, as opposed to actually heading out,” Hasseldine said.
But illion warned this rise in discretionary spending at a time of increased credit delinquency, especially on consumer credit cards and home loans, pointed to a risky “consumer over-exuberance”.
“While interest rates and inflation have stabilised, and some consumers have started to increase their discretionary spending again, many households are still feeling the pinch of higher prices and dwindling savings,” Hasseldine said.
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