Mortgage stress hits 15-year high

New research conducted by Roy Morgan revealed that the number of Australians “At Risk” of mortgage stress has increased by 529,000 over the past year, coinciding with the RBA’s consistent interest rate hikes over the same period.

The data indicates that an estimated 1.38 million mortgage holders, equivalent to 27.8 per cent of mortgage holders, were deemed “At Risk” of mortgage stress in the three months leading up to April 2023.

During this three-month period, official interest rates saw two consecutive increases of 0.25 per cent, bringing the cash rate to 3.6 per cent in April.

As such, this represents the highest level recorded in over a decade since October 2011, when the figure stood at 28.3 per cent and has resulted in the highest number of mortgage holders facing potential stress since August 2008 when over 1.4 million mortgage holders were considered “At Risk”.

The release of this data precedes the RBA’s June decision, with the official cash rate standing at 3.85 per cent in May 2023 and mounting uncertainty surrounding whether the central bank will implement a pause in rate increases.

According to Roy Morgan’s analysis, the potential impact of a 4.1 per cent cash rate, would bring the percentage of mortgage holders “At Risk” to 29.2 per cent, equivalent to 1,408,000 individuals, marking an increase of 30,000.

In addition, the potential impact of two more 25-bp increases, taking the cash rate to 4.35 per cent, would see the percentage of mortgage holders “At Risk” tip 30.2 per cent (1,455,000 mortgage holders), representing a 2.4 per cent increase and an additional 77,000 individuals at risk.

Chief executive of Roy Morgan, Michele Levine, said: “When considering the data on mortgage stress it is always important to appreciate interest rates are only one of the variables that [determine] whether a mortgage holder is considered ‘At Risk’,” she said.

Unemployment 'largest impact' on mortgage stress

“The variable that has the largest impact on whether a borrower falls into the ‘At Risk’ category is related to household income — which is directly related to employment.

“And of course we are already seeing an increase in unemployment."

In fact, the latest Roy Morgan employment estimates for May shows unemployment down 8.4 per cent - marking the fourth straight monthly decline.

“There are a further 1.46 million Australians now under-employed – 9.8 per cent of the workforce. Overall unemployment and under-employment in May is now at 2.72 million (18.2 per cent of the workforce)," Ms Levine said.

“Putting these figures into a broader context shows the huge changes in the Australian labour markets over the last year as immigration into Australia surged following the removal of most COVID-19 border restrictions just over a year ago.

“Of even more concern is the rise in mortgage holders considered ‘Extremely At Risk’, now estimated at 881,000 (18.5 per cent) in April 2023.

This figure "significantly exceeds" the long-term average over the past 15 years, which stood at 661,000 individuals (15.9 per cent), she added.

Despite the significant surge in mortgage stress levels over the past year, it remains below the peak reached during the Global Financial Crisis in early 2009, when it stood at 35.6 per cent (1,455,000 mortgage holders).

Arrears on the rise

Amid the increasing mortgage stress in Australia, mortgage arrears are also on the rise, according to the latest data from S&P Global Ratings.

The data revealed a rise in both prime and non-conforming mortgage arrears during the first quarter of the year.

In March 2023, prime mortgage arrears reached 0.95 per cent, approaching the long-term average above 1.0 per cent. Similarly, non-conforming loans experienced an increase, reaching 3.70 per cent in March, up from 3.20 per cent in December 2022.

While initially, built-up savings and strong job growth helped alleviate the increase in arrears, the situation is gradually changing as the rising cost of living erodes borrowers’ savings buffers.

Lender competition, often referred to as the “mortgage wars”, has also enabled many borrowers to refinance their home loans, which has tempered the growth in arrears.

However, the refinancing market is also showing cracks, with a notable 8.6 per cent decline in refinancing activity in April, as reported by the Australian Bureau of Statistics (ABS).

Although this drop is expected to be temporary, the rising interest rates will impose serviceability constraints, making it more challenging for borrowers to switch lenders.

[Related: How brokers are helping borrowers navigate the fixed-rate cliff]