1-in-5 Aussie mortgage holders face stress as interest rates soar

Roy Morgan has modelled the direct impact of the existing 0.75% lift in the Official Cash Rate (OCR) in May and June on Australian mortgage holders, as well as the expected interest rate increases of 0.5% during each of the next two months.

The interest rate increases already made by the RBA mean that 18.3% of mortgage holders, 796,000, would now be classified as ‘At Risk’ – an increase of 34,000 on the original figure of 762,000 (17.5%).

If the RBA increases interest rates by 0.5% in each of the next two months this would mean 19.4% of mortgage holders, 843,000, would then be classified as ‘At Risk’ – an increase of 81,000. This would be the most mortgage holders classified as ‘At Risk’ since the March quarter 2021 just over a year ago.

Mortgage stress

Roy Morgan considers the risk of ‘mortgage stress’ among Mortgage holders in two ways:

  • Mortgage holders are considered ‘At Risk’ if their mortgage repayments are greater than a certain percentage of household income – depending on income and spending.
  • Mortgage holders are considered ‘Extremely at Risk’ if even the ‘interest only’ is over a certain proportion of household income.

Commenting on the results, Roy Morgan CEO Michele Levine noted that mortgage stress has been at record lows amid all-time low interest rates and financial support from the Government and banks that protected those with home loans. But that looks set to change as interest rates rise:

“If the RBA does go through with these interest rate increases in the next two months there would be a further increase in the number of mortgage holders considered ‘At Risk’ to nearly one-in-five (19.4%) or 843,000 (an increase of 81,000). This would be the highest number of ‘At Risk’ mortgage holders since early 2021 – and with the prospect of further interest rate increases to come…

“These figures suggest that as long as employment levels remain strong the number of mortgage holders considered ‘At Risk’ will not spike alarmingly over the next few months as interest rates are increased from the record low levels experienced during the last two years.

An OCR of 1.85% is manageable. But an OCR of 4.3% by May 2023- as predicted by financial markets – would see mortgage rates more than double from their pandemic low (to 7.7%) and would place enormous stress on borrowers.

Australian mortgage rates

Australian mortgage rates to double under futures market’s forecast.

Monthly principal and interest mortgage repayments would rise by around 50%, which would also smash household consumption – the Australian economy’s biggest driver.

Given Australia has the second highest household debt loads in the world, and the majority of borrowers are on variable rate mortgages, we are more sensitive to interest rate changes than anywhere else.

Unconventional Economist

Comments

        • Depends
          Food wheat etc much higher
          Iron ore copper etc much much higher
          Looks like lumber not much higher.oil probably not much higher
          That’s short term 6 to 12 months

          Over the decade way higher, we are heading into the biggest commodity super cycle in history, there will be downturns & good sell offs & maybe some sort of deflationary crash but they’ll just keep printing money for government infrastructure, households can’t complete with governments
          We face very high prices in most commodities this decade
          It’ll push interest rates to 10% plus with food shortages & very high prices
          Will be near impossible to build a family home or renovate over this decade

          Mining magnates will be the new Zuckerbergs

  1. Leith you need to focus on the stress in the banks
    When home loan interest rates rise above 10% AND THEY WILL
    The government & tax payer will be left paying for this mess

    • One trick ponyMEMBER

      I think I’m yet to see your actual rational for why rates will get that high (you may well have). I‘ve seen you say that bond markets dictate to RBA, not the other way around. I don’t fully agree with that, but even if that part is correct – what makes you think bond markets will price those sort of rates in? My view is that stagflation which gets inflation back to target over a longer period is the lesser evil vs inflation busting Depression, and I believe bond markets and central banks will take the same view.

      • This decade we will see hyper inflation
        There will be a recession downturn but it won’t last long
        They’ll just print more money & send inflation skyrocketing

        • I think your are on the right track bcnich. The deflationary events unfolding and the threat to asset prices in the hyper financialised ecosystem will see CBs turn back to printing in an effort to inflate away debt and to protect the “system”.

        • blindjusticeMEMBER

          lets view the Central Banks money printing shenanigan’s since the GFC as water from taps
          The taps habe been turned onto high pressure since then. It hosed the wrong people (banks etc, the average joe didnt see a drop) who diverted it into housing and asset bubbles in a sort of a HUGE Dam upstream of the wider economy.
          Now………..we have inflation due to various things…….once assets like housing go down they could deleverage and flood that money elsewhere…..like a bursting dam
          the more they raise rates to combat it the worse it gets

    • Goldstandard1MEMBER

      I keep hearing the story over and over that central banks will raise until the economy slows then they cut. People seem to think thats where it ends and they’ll keep their job and house. This is far worse than that. That was 2008, and I would say this is 10 times worse with no levers to pull.

      • One trick ponyMEMBER

        How is central banks pausing and ultimately cutting not a lever? Agree it might not be enough to prevent some pretty tough times, and nor should we even think about relying on the same kind of unconventional monetary policy support seen over the last 15 years (albeit I’m not ruling it out either – depends on just how bad things get IMO). To be clear though – I’m not hanging my hat on some new unconventional trick from central banks, nor am I arguing that things aren’t about to get pretty tough. My only argument has ever been that interests rates won’t get anywhere near as high as markets think.

  2. Frank DrebinMEMBER

    Pretty much spells the end of most F B and retail businesses as all income is diverted to mortgages.

    How do you invest in insolvency practitioners ?!.

  3. Grand Funk RailroadMEMBER

    Can anyone tell me off the top of their head what the average Australian monthly mortgage repayment is?

    By my back of the envelope calculations the average mortgage is circa 600K. That would make the average repayment circa 5k per month. Before quibbling about how much a 600k mortgage would get in Sydney or Melbourne, I cant help thinking that 5k per month is pretty much the take home of an average circa 80k income.

    Now if we think a lot of the families or households paying that 5K per month have had something close to a doubling of their fuel prices in the last 8 months or so, and are looking at very major jumps in their gas or electricity rates, and are currently popping down to their supermarkets to cast their eyes on $9 /kg broccoli (inter alia) the whole thought that that 5K per month might become 6K per month real soon could be fairly upsetting

  4. blindjusticeMEMBER

    So we could end up with a property crash with people losing their homes while rentals are non existent. Migration will run hard again and the new arrivals will be able to buy at the low prices.

    I think the rental vacancy rate is so low we could forecast that Migration of x amount will equal y amount of homeless.

    What fun times ahead. Great for a cohesive multicultural society.

    • Dave666MEMBER

      Yes, that’s why its not a major problem yet, despite what the media keep saying.

      Phil Lowe and the RBA know this also. That’s why they are not worried…..well except for the 6% of households which are represented by Phil’s left eyebrow.

    • Leroy Huggins

      Yes only 6% of households in financial stress due to mortgage payments, but how many more due to rental payments or other debt stress? I think probably closer to 25% of Australian households under real financial pressure at the moment (or directly heading into it), and 25% pretty flush with cash… (the middle 50% seeing expenses rise, but still with incomes with some room for some expense growth). As Australians tighten their wallets though, and consumer spending slows the former will grow.

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