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Bank warns rate hike could trigger spike in defaults

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Reporter 2 minute read

One non-major bank believes that mortgage stress is set to worsen, with an increasing number of Australians at risk of defaulting on their mortgages if interest rates rise.

Almost half (46 per cent) of Australians have reported that they contribute more than 30 per cent of their disposable income towards their mortgage repayments, according to ME Bank’s Household Financial Comfort Report.

Of the surveyed borrowers contributing more than 30 per cent of their income to their home loan, 14 per cent reported that over 50 per cent of their disposable income is used to repay mortgage debt.

Further, 51 per cent of mortgage holders reported concern over their “household’s level of debt over the last month”, compared to 27 per cent of those without a mortgage and 23 per cent of respondents that own their home outright.

Moreover, 7 per cent of respondents reported an inability to repay their mortgage on time throughout 2017.

According to ME Bank consulting economist and co-author of the report Jeff Oughton, more Australians could be at risk of defaulting on their home loans if the Reserve Bank of Australia (RBA) decides to increase the cash rate, with 47 per cent of mortgage holders claiming that they would be “worse off” if the cash rate rose by up to 1.0 per cent.

“Mortgage defaults may escalate if interest rates increase, particularly among vulnerable low-income households already dealing with the rising cost of necessities,” Mr Oughton said.

Additionally, the Financial Comfort index revealed that borrowers with only an investment property mortgage reported the highest level of financial comfort (6.61 out of a possible 10), followed by respondents that own their home (6.43), borrowers with owner-occupier and investment mortgage (6.16) and owner-occupier mortgage holders (5.2).

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Meanwhile, the overall Household Financial Comfort index remained stable at 5.49. However, comfort with paying monthly living expenses fell by 3 per cent to 6.40 in the six months leading to December 2017, the lowest it’s been since 2014.

“[ME’s] latest report shows many households’ financial situation is getting worse and again the culprit is living expenses, with 40 per cent reporting this as a key reason their situation is worsening,” Mr Oughton said.

“It’s unsurprising households are still feeling the pinch, given subdued income growth and the rising costs of energy, childcare, education and health.”

[Related: More borrowers consider their mortgage a burden than a benefit]

Bank warns rate hike could trigger spike in defaults
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