Mortgage stress eases despite Cup Day rate rise

Data released by Roy Morgan has revealed that 1.49 million mortgage holders (29.9 per cent) were at risk of mortgage stress in the three months to November 2023.

This period included only one interest rate rise on Melbourne Cup Day in November last year, when the Reserve Bank of Australia (RBA) hiked the official cash rate to 4.35 per cent – the highest rates have been since December 2011.

Roy Morgan attributed the decrease in mortgage stress to a combination of several factors, including increased household incomes, increased employment, and reduced amounts borrowed and outstanding.

This represents the first time since January 2022 (before the RBA began increasing rates) that mortgage stress has decreased for two straight months.

However, despite the easing in mortgage stress, the research pointed out that this was only the sixth time in the history of the index that over 1.45 million mortgage holders were considered “at risk”.

Moreover, the number of Australians at risk of mortgage stress remains near the record high reached in September 2023 (1,573,000).

The proportion of mortgage holders at risk is well below the record high reached during the Global Financial Crisis because of the larger size of the Australian mortgage market today.

In mid-2008, a record high of 35.6 per cent of mortgage holders were in mortgage stress.

The Roy Morgan research also showed that the number of Australians at risk of mortgage stress has increased by 683,000 since May 2022 when the RBA began its cycle of raising interest rates.

Meanwhile, the number of mortgage holders considered “extremely at risk” of mortgage stress is now at 934,000 (19.3 per cent of mortgage holders), significantly above the long-term average over the last 10 years of 14.2 per cent.

The number of mortgage holders at risk of mortgage stress could increase to 1.53 million in February 2024 if the RBA increases the interest rate by another 25 basis points to 4.60 per cent, according to Roy Morgan modelling.

The proportion of mortgage holders at risk could increase to 30.8 per cent (up 0.9 per cent in November) under this scenario.

Roy Morgan CEO Michele Levine said the research house modelled another interest rate increase in February this year for a range of reasons.

“There is further good news with the release of the latest ABS monthly inflation figures for November 2023 which showed a sharp decline in the indicator to 4.3 per cent (down 0.6 percentage points from a month earlier),” Ms Levine said.

“This is the lowest annual inflation in Australia for two years since January 2022 – and the upcoming figure for December 2023 is expected to drop further and well below 4 per cent.

“Although inflation pressures appear to be easing, there is the possibility a higher-than-expected inflation reading for December would re-ignite fears that inflation is set to persist during 2024. For these reasons we have modelled another interest rate increase next month in February.

“If there is a reacceleration in inflation over the months ahead that results in further interest rate increases in 2024 levels of mortgage stress will start trending upwards again despite easing in recent months.”

Commenting on the decrease in mortgage stress in November, Ms Levine said the extended pause in official cash rate increases for four months from July to October 2023 reduced the pressure on mortgage holders and allowed growth in several areas of the economy to catch up and ease mortgage stress.

“A deeper analysis of the underlying factors affecting mortgage holders shows a combination of factors leading to the easing of mortgage stress in the last few months,” she said.

“In recent months household incomes and employment have both increased strongly while there’s been a reduction in the amounts borrowed and outstanding.

“While banks are less likely to lend to those who might be ‘stretched’, people with mortgages tend to do everything within their power to reduce their mortgage size including by downsizing and selling other assets to maintain their mortgage payments and avoid defaulting.”

She continued: “When home loan interest rates were low during the pandemic, people used their home loans to fund what we might call the ‘business of life’ – small businesses, trips, home improvements, school fees, second and holiday homes.

“During this period home loans were a cheap form of financing. The increase in interest rates has encouraged people to think again about this kind of funding – and they’re making different choices.”

If you’re looking to refinance for a better rate or are looking for the right rate for your clients at zero cost, contact Finni Mortgages’ experts and let us do the hard work for you.

Visit our website here or call 1300 002 023 to learn how we can help you!

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