One-third of Australian home loan borrowers have little or no repayment buffer on their mortgages despite record low interest rates, according to the Reserve Bank of Australia (RBA).
And those most at risk, when interest rates rise, are low income families, those who’ve only recently taken out a mortgage and those in some regional areas hit by the downturn in mining.
Household debt has been piling up to meet strong rises in house prices while wages, growing at the slowest rate on record, haven’t kept pace.
Many Australians have increased the resilience of their household balance sheets by prepaying their mortgages, according to the April RBA Financial Stability Review.
Overall balances in offset accounts and redraw facilities are high at 17% of outstanding loan balances, or about two and a half years of repayments at current interest rates.
“However, these aggregate figures mask significant variation across borrowers,” the RBA says.
The RBA says the data suggests that one-third of borrowers have either no accrued buffer or a buffer of less than one month’s repayments.
The banks, with urging from regulators, have recently moved to take the heat out of investor borrowing for property by increasing interest rates and restricting interest only loans. The banks have generally have also started lifting rates for home occupiers as well.
This has made it harder for some to get a loans but there is still a significant proportion of those with current loans making repayments month-to-month and vulnerable to any economic downturn.
“Those with minimal buffers tend to have newer mortgages, or to be lower-income or lower-wealth households,” the RBA says.
“Weak economic conditions, and declining housing prices, continue to present challenges to the financial health of households in regions with large exposures to the mining sector.
“For example, the rate of personal administrations in Western Australia increased further over the second half of 2016.
“While commodity prices have increased, this seems unlikely to translate into significantly improved labour market
outcomes in these regions in the near term.
“If housing prices continue to decline in these locations, then banks may face additional losses on their mortgage portfolios.”
Low interest rates are helping to offset the cost of servicing larger amounts of debt. The RBA says total mortgage servicing costs remain around their recent lows, as this chart shows:
The RBA says the financial position of households has so been resilient but vulnerabilities persist for some highly indebted households, especially those in resource-rich states.
Household indebtedness, as measured by the ratio of debt to disposable income, has increased further, primarily due to rising levels of housing debt, although weak income growth is also contributing, the RBA says.
“While it is not possible to know what level of overall household indebtedness is sustainable, a highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply,” the RBA says.
“A further risk during periods of strong price growth is that it may be accompanied by an increase in construction that could result in a future overhang of supply for some types of properties or in some locations.
“In this environment, as well as amplifying the upswing for such properties, any subsequent downswing is likely to be larger and more likely to see prices and rents fall if the vacancy rate rises.
“This poses risks to the whole housing market and household sector, not just to the recent investors.”