Mortgage interest payments crater to 21 year low

The Reserve Bank of Australia (RBA) yesterday released household finances data for the March quarter of 2021.

This data showed that the ratio of household and mortgage debt to disposable income rose slightly to 180.9% and 138.8% respectively over the March quarter:

Australia's household debt

Still below peak.

Household debt is being driven by owner-occupier mortgages, where debt levels hit a record high 100.2% of household disposable income in the March quarter, whereas investor mortgage debt fell to 38.6% of household disposable income:

Australian household debt

Owner-occupier debt at a record high.

At the same time, the collapse of mortgage rates has driven the ratio of interest payments as a share of household disposable income to a 21-year low, as illustrated in the next chart:

Australian household interest payments

Cheap money.

Specifically, the ratio of household debt to income fell to 5.8% in March 2021, less than half the peak of 13.3% in December 2008.

In a similar vein, the ratio of mortgage debt to income fell to 4.9% in March 2021, less than half the peak of 10.6% in December 2008.

Finally, separate data from the Bank for International Settlements shows that debt repayments (both principal and interest) as a share of household disposable income fell to a 17 year low of 13.6% in the December quarter of 2020, which is 4.0% below the June 2008 peak of 17.6%:

Aussie debt repayments

Household’s debt repayment burden has shrunk.

In summary, Aussie households are sitting pretty despite their big household debt loads. Problems won’t arise until interest rates begin to rise.

Unconventional Economist
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Comments

    • So the banks are saying the bottom is in. Considering the inflationary environment we have with all the extra stimulus why would anyone lend money at 2%?

      • Jumping jack flash

        Interest rates must rise because the state they are currently in is a joke and the global economy is a shambles.

        But the banks are acutely aware that if they raise interest rates then everything implodes. Its not their intention to kill their host economy.

        In my opinion the recent inflation is being induced in the hope that it induces wage inflation which has been absent for a long time.

        If they succeed then interest rates can safely rise, but we will probably be running at around 6% CPI or more so that can happen.

        What else is there to do? Its not like we can ask all our factories producing useful items we sell to the world for profit to increase their output to grow revenue and then wages. All our factories are long gone. Its not like we can build more factories, because even if it was possible it would be forbidden because factories are taboo.

      • ” why would anyone lend money at 2%?”
        Because someone else(Reserve Bank) will lend them it at 1% or less if they do and allow them to keep the difference.

  1. With the stimulus funding from the Commonwealth, has anyone done any economic modelling on the effects of rate rises. I was talking to an accountant here in Brisbane and he said that the banks are using 4% to assess credit worthiness and stress testing at 7%. This seems like things will change reasonably quickly. Bit of a BBQ stopper that one, as I found out over the weekend. I dont think people have taken this into account and think 2% is here to stay….

    • MountainGuinMEMBER

      Its probably just as much a behavioural question as an economic one. If fear and caution was a bbq stopper for you then I suspect when we get the variable rate going up and people get their next loan statement, that’s when behaviours change.

  2. reusachtigeMEMBER

    Yeah now is the time to gear up to the maximum and even more if you can “convince” them then get out there and invest in any piece of property you possibly can no matter what it is. You can only win on property!!

  3. Jumping jack flash

    This seems promising but the total yearly interest bill must still be an enormous burden on the economy. Do we still collectively own over 2 trillion outstanding mortgage debt dollars? I would be surprised if it has fallen, in fact if it has fallen then that would certainly be deflationary in this kind of economy unless it was replaced by government spending like COVID stimulus, say.

    It looks like the average mortgage interest rate is finally falling from 5% which is what it was just a few short years ago, to whatver it is now, maybe 2 or 3%?

    Some quick and dirty calculations will still show that the interest burden of the huge wad of nonproductive debt that forms the foundation of our debt economy, payable each and every year that the debt exists, is a colossal drag on our consumption and growth of all things including but not limited to wages growth.

  4. Lurker Lurken

    Still that Mr south thinks all time high in mortgage stress? LolLolLo
    Boom times!

  5. Display NameMEMBER

    So interests rates can never go up substantially again?

    Anyone who has borrowed at 6,7,8+x debt to income in last 3 or so years must hope that in the next 20 years or so of their mortgage the interest rates are the same or lower OR their wages grow substantially.

    Who is going to take that bet.

    • If enough people do it becomes almost self fulfilling.
      Because the consequences of it not become too great to be allowed.

  6. Isn’t it funny to think that by all the economic laws that we hold holy Australia’s dream run should have come to an abrupt end at least a decade ago…yet it didn’t
    and then it should have crashed and burned about 4 to 5 years ago …yet it didn’t
    Is this just another Aussie case of the lucky country pulling successive rabbits out of the economic hat, or is there more to it?
    Is our economic theory is completely broken? or was it always just a theory, nothing you can take to the bank!
    What reality are we left with: Economic theory, (two swings two misses) Vs Aussie Dream (two swings two home runs)
    The gambler in me figures the odds are now heavily stacked on the side of Economic Theory for a win, but then I look at the consequences of such an outcome and conclude that most Aussies would lose big time if Theory even gets a bat to the ball.
    So what do you do? Do you abandon 100 years of solid well grounded Economic theory, or ….IDK?
    One thing is clear the solution has jumped out of what one might call the traditional economic sphere and has landed well and truly within the domain of Behavioral science.
    But that leaves us with the underlying question: Do bad Economic decisions have long term consequences?

  7. I wouldnt be surprised if interest rates dont go up, it will just hasten the collapse of currencies/economies.
    I also wont be surprised if the only resolution is a World currency like SDRs probably “backed” by gold but not exchangable for gold for the common person, just “backed” to give it some credibility.
    And it might be digital, so “they” have more control of the new “currency”.
    Meanwhile, until then, the Governments and Central Banks can keep on trashing/printing/spending until their respective currencies are stuffed and hyper inflated into the history books.
    Would be a good time to borrow/print as much as they can and spend big on infrastructure etc.

  8. I haven’t checked the numbers yet but i would not be surprised if there has been a big rise in 3 year fixed morgages. Some of these are as low as 1.8%. if rates do rise it wont be until after the fixed period where you will see issues.