‘Pretty dire’: How stressed home borrowers could be about to break

Another 2000 borrowers would fall behind on their home loans after any extra rise in the cash rate, modelling from credit bureau illion has found.

Households that took out loans recently at lower interest rates are among the most at risk, experts warn.

Separate figures from Canstar found borrowers who stretched themselves to buy a home with a 5 per cent deposit at rock-bottom interest rates would now be in mortgage stress, paying about 40 per cent of their income on loan repayments.

It comes as the Reserve Bank prepares to meet next week to consider whether to move the cash rate, taking into account Wednesday’s inflation figures as well as the state of the jobs market and the health of the economy.

In May, 0.81 per cent of home borrowers were at least 30 days behind on their repayments, illion found, and the figure has hovered above 0.8 per cent this year. It has ticked up since 2022 when fewer than 0.7 per cent of borrowers were running late and many homeowners still had low fixed-rate mortgage deals, but remains lower than in 2019.

For every extra rate rise, illion estimates the published delinquency rate would rise 0.03 percentage points or about 2000 borrowers.

Barrett Hasseldine, illion head of modelling, said the proportion of home borrowers behind on their repayments had been increasing as interest rates rose and homeowners rolled from low fixed rates onto higher variable rates.

He said the vast majority of borrowers didn’t miss mortgage repayments, but an uptick in those that fell behind indicated that credit stress was growing among homeowners.

“Those households will need to be considering the household budget even more stringently than they have been already,” he said.

“We’ve already seen cutbacks in discretionary spending and even some essential spending if you include insurance as essential. We’ll quite possibly see more of that from, especially, those who are starting to fall behind on their mortgage payments.”

He said the stress was felt most among households that borrowed recently on low rates and hadn’t built up any cash buffers, including owner-occupier apartment buyers across inner Melbourne and Sydney.

But there had been widespread cutbacks on household spending on retail, entertainment, restaurants and bars over the last couple of years, he said, as well as cuts to essentials such as health insurance and home and contents insurance. Demand for credit cards increased too.

Banks were acutely aware of the financial stress consumers were facing, he said, and could generally work with their customers to help, such as restructuring home loans or offering hardship provisions.

Canstar group executive of financial services Steve Mickenbecker encouraged borrowers to talk to their bank if they were having trouble repaying their loan.

Modelling from Canstar found a couple who bought a home on a 5 per cent deposit using the First Home Guarantee Scheme in 2022 on the minimum income possible would have had repayments of less than 30 per cent of their combined income, the rule of thumb threshold for housing stress.

But the same couple, even if they had a typical pay rise since, would now face such an increase in their mortgage repayments that they would be paying more than 41 per cent of their income on their home loan in Sydney and nearly 40 per cent in Melbourne.

Mickenbecker said a 40 per cent repayment to income ratio was “pretty dire”.

“So a lot of those people are going to be really struggling,” he said.

“People will make all sorts of sacrifices to avoid losing the house. And they should because if you have to sell the house, even if you do it voluntarily and don’t wreck your credit rating, you’re going to be in a position where you’ll take quite a while to get into the market.”

But if someone approached a bank under hardship provisions, it should not affect their credit record, he said. He also recommended borrowers talk to the National Debt Helpline.

Independent economist Besa Deda said although a delinquency rate of about 0.8 per cent was low overall, it had picked up after a string of rate rises.

“Younger households, lower income households, those that have probably got into the market only recently, they would be among some of the cohorts that are more likely to experience financial stress,” she said.

Any further increases to the cash rate could cause households stress, she said.

But she added many customers were prepared for interest rate rises because their banks were being proactive or because there had been a lot of information about the hikes.