Many recent and highly leveraged home owners are edging towards arrears, raising doubts about whether borrowers can weather fresh rate hikes.
The Reserve Bank of Australia’s Board is due to hand down its latest cash rate decision on Tuesday, with major banks broadly expecting a hike – intensifying pressure on borrowers who are already showing clear signs of strain.
Fresh figures from credit bureau Equifax point to a noticeable fault line running through the mortgage market, with recent home buyers and larger loans now over‑represented in arrears.
In February, 0.78 per cent of new home loan holders were at least 30 days behind on their repayments – double the 0.39 per cent arrears rate among borrowers who purchased earlier.
The strain is even more evident at the serious end of the spectrum, with Equifax reporting that loans of more than 750,000 dollars recorded an 8.9 per cent year‑on‑year increase in late‑stage arrears, indicating that higher‑debt households are finding it harder to keep up as rates rise.
Many borrowers admit they are near their limit
Sentiment data mirrors the emerging stress in arrears numbers, with new research from comparison site Finder showing a sizeable minority of mortgage holders believing they are only one or two moves away from default.
A survey from Finder, released on Monday (4 May), asked mortgage holders how many additional rate rises they could withstand before defaulting on their home loan.
Almost one in ten (9 per cent) respondents said they could no longer sustain their mortgage if faced with up to two additional rate hikes, equating to about 297,000 mortgagors.
A further 3 per cent – roughly 100,000 borrowers – reported they were already on the brink, saying they could only absorb a single extra rise before slipping into arrears.
Another 9 per cent indicated that three further hikes would push them over the edge.
NAB sees solid buffers, but warns of stress at the margins
National Australia Bank (NAB) group chief executive Andrew Irvine told the bank’s half‑year results media call that the RBA faced a difficult path.
“I think the Reserve Bank has a devilishly difficult job ahead of them, inflation is running too high and we’ve got to get it under control,” he said.
“Our house view is that there’s another rate hike to come and we believe that it’s likely going to come today.”
He emphasised that many of the bank’s housing customers built up repayment buffers during the low‑rate period and had not reduced their instalments when interest rates fell - meaning their repayments have only now begun to catch up with the cash rate.
“Customer buffers are very good. 80 per cent of NAB’s customers chose not to reduce their payments when rates came down and so if rates do go up tomorrow, or at some point in the future, this will be the first time that their payments actually are going to be adjusted,” he said.
He added that strong deposits and offset balances were helping many households absorb higher repayments.
“When we look at our customer portfolio, many have strong offset balances and strong deposit levels. I’d say - for most households - they can manage through this,” Irvine said.
However, he acknowledged that not all customers would be able to weather further hikes.
“The challenge is on the margins, and there will be households that are entering hardship and we will be there for those customers, it’s important that we will call them, look after them and help them through this more challenging time,” he said.
Irvine noted that NAB had moved to bolster its balance sheet ahead of a potentially tougher phase in the credit cycle.
He described the bank’s decision two weeks ago to strengthen its capital and provisioning coverage as “sensible, precautionary moves to ensure we can continue to grow our business and help our customers through more uncertain times.”
What another 25‑point hike would cost
If the RBA follows through with a 25‑basis‑point increase today, borrowers on variable rates face another step‑up in monthly repayment.
Data from Canstar notes that a move from 4.10 to 4.35 per cent would add roughly $77 – $121 a month to repayments on an average variable‑rate mortgage.
For common owner‑occupier loans on principal‑and‑interest terms with 25 years remaining, a $500,000 mortgage would see repayments climb by about $77 - $79 dollars a month, while a $736,000 loan – roughly in line with the national average – would rise by around $111 dollars.
[Related: Softer CPI fails to shift majors’ May hike forecasts]
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