Why ‘scarred’ home owners are choosing to spend more and save less

Beware the politician – or columnist – who does not express sympathy and feel the pain of millions of Australians paying off their mortgages.

This week’s decision by the Reserve Bank of Australia to hold the cash rate steady at 3.85 per cent had everyone from Treasurer Jim Chalmers down expressing their sympathy for borrowers, and the discomfort caused by the denial of a quarter percentage point cut in interest rates.

Credit: Dionne Gain

To quantify that pain (as AMP’s chief economist Shane Oliver helpfully did), the RBA lifted official interest rates 13 times between 2022 and 2023. On a mortgage of $660,000, those increases led to home owners paying an extra $16,800 in annual repayments. The two rate cuts from earlier this year reduced that figure by $2520, but in anyone’s book, being down $14,000 a year is bloody painful.

Yet something else is going on.

Every major bank in Australia is reporting that an overwhelming majority (around 90 per cent) of their mortgage customers have not reduced their repayments, despite having the opportunity to do so following this year’s interest rate cuts.

In other words, given a choice between easing their financial pain and pocketing an extra $2520 or marching on, millions of Australians are making a conscious decision to stick with their repayments and try to get ahead on their mortgage.

If there were so many people in pain, surely they would be lining up at their local bank branch (or more likely making an adjustment through their bank’s website) to take a couple of hundred dollars off their monthly repayments?

Of course, there has to be some pain out there. In the 12 months to the end of March (the latest available numbers), Australian borrowers made a record $125 billion in repayments and interest on their mortgages. In the 12-month period before the RBA started lifting rates, this cumulative figure was $75 billion.

Any way you look at it, that extra $50 billion is a lot of money. And not only have Australian mortgage holders absorbed that, they have also managed to lift their excess repayments.

Back in the 2021-22, $43.4 billion in extra mortgage payments were made. Over the past 12 months, that figure climbed to $45.3 billion in additional repayments – on top of the extra $50 billion in interest caused by the RBA’s war on inflation.

Up to three-quarters of borrowers are ahead on their repayments. Unsurprisingly, high-income households are doing the best with a median period of 20 months ahead. But even among the bottom 20 per cent of income earners, the median prepayment level is 10 months. All these figures pre-date the rate cuts, and measures of arrears rates across all banks remain extremely low – around the levels recorded before the COVID pandemic.

We do know, however, that charities are reporting a sharp lift in the number of people who are using their services for the first time. These are mortgage holders who are throwing money at their repayments, but struggling to put food on the table.

Supermarkets have also reported people seeking out bargains or lower-priced options. Rather than brand name Scotch Fingers, for example, they are dunking home brand versions in their coffee.

The Commonwealth Bank’s economics team has tried to reconcile why so many of its customers are maintaining their mortgage repayments despite falling interest rates. According to the bank’s chief economist Luke Yeaman, consumers are making the choice because they’re “scarred”.

Scarred by the spike in inflation (including the huge swings in petrol and energy prices), scarred by the steep fall in household disposable income of recent years, scarred by the turmoil in the Middle East, and scarred by whatever twitch in policy most recently enunciated by President Donald Trump.

All of that understandably transpires into a world where people scrimp and save, trying to pay down debt as fast as possible, even when that debt is some of the largest mortgages in the world, and even when it means day-to-day financial pain. And all of which comes as no surprise to the banks.

In its quarterly monetary policy statement released on the day it cut interest rates back in May, Commonwealth Bank staff noted that greater uncertainty would likely lead to increased saving by both businesses and consumers.

“Some households may delay large purchases and increase precautionary savings. There is some empirical evidence, including for Australia, that high uncertainty leads to a decline in business investment, with negative but smaller effects on employment, household consumption and inflation,” it noted.

Three weeks later, the national accounts for March showed that despite the bank’s February rate cut, household saving levels lifted, reaching their highest level since the second half of 2022.

That period – late 2022 – was also dominated by uncertainty as inflation was surging, and the RBA was in the process of increasing official interest rates by three percentage points.

Despite overwhelming expectations that it would deliver a cut, the Reserve Bank defended its decision to hold interest rates this week on the grounds there was uncertainty over how quickly inflation was falling. But in doing so, it only added to the uncertainty.

In its May monetary policy statement, the RBA noted that economic uncertainty may lead to consumers increasing their savings, explaining that, “High levels of uncertainty can lead firms to delay investment decisions that would be costly to reverse because it increases the value of waiting for additional information”.

On Tuesday, the RBA increased uncertainty that, by its own research, slows the economy, eases inflation pressures and leads to businesses to delay necessary investment. All of that, just hours before Donald Trump threw the global pharmaceutical and copper industries into a spin.

No wonder households are continuing to inflict mortgage pain upon themselves.

Shane Wright is a senior economics correspondent and regular columnist.