Loans, expenses outstrip income for 5pc of mortgaged borrowers: RBA analysis

One in 20 mortgaged borrowers are at a ‘high risk’ of falling behind on their loan repayments, according to new analysis, as investors expect rates to remain on hold until next year.

New analysis from the RBA has found 5pc of borrowers are in a ‘cash flow shortfall’.

One in 20 mortgaged borrowers are at a “high risk” of falling behind on their loan repayments, according to new analysis from the Reserve Bank, as investors and most economists expect interest rates to remain on hold until next year.

The RBA’s biannual Financial Stability Review, released on Thursday, found approximately 5 per cent of owner-occupier borrowers were in a so-called “cash flow shortfall”, spending more than they were earning to cover the cost of loans and other essentials.

“In addition to cutting back their spending to mostly essential items and trading down in quality for some goods and services, these households have had to make other difficult adjustments to continue servicing their mortgages,” the review found.

“These include drawing down on liquid savings, selling assets and working additional hours.”

Much of this cohort were borrowers on low incomes, the central bank said.

Of all owner-occupier borrowers, 0.5 per cent had fallen more than three months behind on their repayments; for highly leveraged borrowers – whose mortgages were worth more than 80 per cent of their home’s value – that figure was 2 per cent, and rising.

“Borrowers with high leverage are more vulnerable to challenging economic conditions and also tend to have lower savings buffers, which makes them more likely to fall behind on their loan payments,” it said.

Since the central bank commenced its run of 13 rate hikes in May 2022 to curb inflationary pressures, most household borrowers have experienced an increase in their minimum scheduled payments of between 30 and 60 per cent.

While the RBA anticipates the share of borrowers behind on their repayments to rise further, that increase is expected to be minimal, with two-thirds of high-risk borrowers having more than six months of savings buffers.

Overwhelmingly, however, the RBA found the vast majority of borrowers continued to be able to service their debts and most had maintained, if not added, to their mortgage savings buffers.

As RBA governor Michele Bullock on Tuesday said some households were being forced to make “very difficult decisions” to make ends meet, she again continued to rule out a pre-Christmas rate cut amid stubbornly persistent inflationary pressures.

Money markets ascribe a 77 per cent chance of a rate cut at the RBA’s final meeting of the year, scheduled for December, and are fully priced for a quarter-point cut by February. Most economists similarly do not expect rate reductions until early next year.

The RBA expects the number of at-risk borrowers to fall from its current level of 5 per cent to 2 per cent in 2026 as household incomes recover because of the stage three tax cuts, a further easing in inflation and rate cuts.

“While conditions will remain challenging for the group of borrowers already experiencing acute budget pressures, our projections imply that most mortgagors would remain able to service their debts,” it said.

After the corporate regulator lashed bank and non-bank lenders’ for their hardship procedures, finding they had created “unnecessary barriers hindering customers from obtaining assistance”, the RBA also found extra steps had been taken to support customers struggling to meet repayments.

“Many institutions have improved processes to identify stressed borrowers at an early stage and set up hardship arrangements before borrowers fall behind on their repayments,” the review said.