Home loan arrears: The confronting number of Australians whose bills are more than their income

A worrying number of Australians with mortgages now have bills that exceed their income.

One in 20 borrowers now have negative cash flow with expenses exceeding their income, the Reserve Bank’s Financial Stability Review for March showed.

“Most borrowers continue to be able to pay off their debts and cover essential costs from their income, despite their budgets being squeezed by higher interest rates and inflation,” the report said.

“However, it is estimated that around five percent of variable rate borrowers have expenses exceeding their income as interest rates and prices have risen in recent years, leading to an estimated cash flow shortfall.”

With cash rates at a 12-year high of 4.35 per cent, the RBA warned borrowers they would have to cut back on spending to cope. Governor Michele Bullock said last week that it was too early to talk about the prospect of a rate cut.

“If inflation remains high for longer than forecast, the small number of borrowers close to cash flow shortfalls could have to make further difficult adjustments to their finances to meet their obligations,” the Reserve Bank report said.

The Reserve Bank also predicted that three percent of borrowers would have no savings by the end of next year if interest rates remained high.

“Despite greater fiscal pressures in the ‘longer-for-long’ scenario, we estimate that less than 3 percent of variable-rate retail borrowers are at risk of depleting their liquid savings buffers by the end of 2025,” the report said .

‘Mortgages with low buffers and a high debt burden are more likely to fall behind on their loan payments.’

The Reserve Bank said high cash rates were a big factor causing negative cash flow, ahead of wages that have lagged inflation until recently, and unemployment.

A borrower with an average mortgage of €615,178 has seen their monthly mortgage repayments increase by more than two-thirds, or 67.7 percent, since May 2022.

The Reserve Bank’s thirteenth rate hike in eighteen months, in November, meant the average borrower paid $3,966 a month, up $1,601 from $2,365 less than two years ago.

The Reserve Bank’s Financial Stability Review for March found that one in twenty, or five percent of borrowers, have negative cash flow

But less than one percent of all home loans are in arrears of 90 days or more, causing the loan to default, and only two percent are in arrears of 30 days or more..

“Strong labor market conditions, the large savings buffers that many borrowers have built up during the pandemic and rising house prices are helping households adapt to challenging economic conditions,” the RBA said.

“Many households have made adjustments, including reducing their discretionary spending and savings, increasing their working hours, and some have drawn on savings buffers.”