The FSR highlights how these households are making significant sacrifices and adaptations to keep up with mortgage payments. “Besides scaling back their expenditure to mainly essential items and opting for lower-quality goods and services, these families have had to employ other challenging strategies,” the report outlines.
The strategies mentioned include:
- Tapping into their savings.
- Selling off assets.
- Increasing their work hours.
Unsurprisingly, those in the lower-income bracket are disproportionately represented in these scenarios.
The RBA further notes that around one-in-50 borrowers are at a critical risk of default, grappling with both cash flow shortages and minimal financial buffers. Such findings underscore the fiscal tightrope many Australians are walking.
Interestingly, the FSR points out that the pandemic-induced period of low interest rates saw a surge in savings buffers, but these have since receded to pre-pandemic levels for the majority of borrowers. “The proportion of variable-rate owner-occupier borrowers consistently drawing from their offset and redraw balances is now higher than it was prior to the pandemic,” the FSR mentions.
On a brighter note, the RBA anticipates a reprieve for households in the second half of 2024, mainly due to the Stage 3 tax cuts scheduled to come into effect. This relief is expected to be further bolstered by potential reductions in the official cash rate. “If budget pressures indeed alleviate as predicted, the percentage of borrowers facing cash flow issues is projected to dip by a few points by 2026,” the FSR projects.
However, these assumptions hinge on the prevailing employment scenario. An unexpectedly high uptick in unemployment could exacerbate financial stress among debt-laden borrowers. The FSR points out, “Individuals who face job loss or a reduction in hours typically encounter significant income drops, increasing their risk of falling behind on loans.”
On a reassuring note, the RBA mentions that even with a 2% rise in the unemployment rate, few borrowers are deemed to be at imminent risk of default.
This analysis underscores the delicate balance between employment, interest rates, and household financial stability in Australia—elements that will be closely monitored in the coming years.
