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One out of Five Mortgage Holders in Financial Trouble: 5% Spending More Than They Make

The Reserve Bank has revealed that approximately three percent of owner-occupiers are facing serious financial challenges as a result of the recent interest rate increases imposed by the bank. Despite this, most households are managing to cope with the higher rates.

The RBA’s March 2024 Financial Stability Review indicates that a significant portion of families with mortgages are now spending more than they earn due to the impact of interest rate hikes. The minimum payments for many mortgagors have increased by 30 to 60 percent since the cash rate was first raised in May 2022.

While inflation and tight monetary policy continue to put pressure on households and businesses, factors such as improved supply chain disruptions, lower energy prices, strong labor markets, stable household finances, and robust corporate earnings have provided some relief.

Although there has been a slight increase in housing and personal loan arrears since late 2022, they remain below pre-pandemic levels. The RBA notes that some borrowers have sought temporary hardship arrangements from their lenders, helping to keep arrears rates lower than they might otherwise be.

Commercial banks anticipate a gradual rise in arrears, but they expect them to remain historically low based on current economic projections.

External risks such as cyber-attacks, climate change, and geopolitical tensions are also highlighted by the RBA as potential threats. Additionally, the bank acknowledges that lower-income households and heavily indebted households are among the most affected by current policy settings.

Despite the challenges faced by many households, the RBA predicts that pressures will gradually ease over the next few years as inflation declines and real incomes increase. Many families have managed to keep up with repayments by adjusting their spending habits, increasing work hours, and tapping into savings. The RBA also points out that most households have adequate savings to cover cash flow shortfalls.

While businesses overall have seen improvements in profit margins and balance sheets, some sectors, especially those reliant on consumer spending, continue to face financial strain. The RBA cautions that labor market conditions and sluggish growth may present hurdles for households, particularly for those already facing budget pressures.

Despite these challenges, the RBA expects most borrowers to continue meeting their debt obligations on time. However, the bank warns that 2024 could be a tough year for borrowers already struggling financially, even under the most optimistic scenarios.

Even in a scenario where inflation persists longer than expected, the RBA estimates that less than three percent of owner-occupier borrowers with variable rates would deplete their liquid savings buffers by the end of 2025, representing a slight increase from previous projections.

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