Understanding Mortgage Stress

Mortgage stress is characterized by Roy Morgan as a situation where borrowers' mortgage payments exceed a predetermined level, typically ranging between 25% and 45% of their income and consumption. Those labeled as "At Risk" face a genuine threat to their financial stability.

In July 2023, the Reserve Bank of Australia (RBA) implemented 12 interest rate hikes, driving the official cash rate from 0.1% in May 2022 to its current level of 4.10%. This rapid increase in interest rates has significantly contributed to the alarming rise in mortgage stress levels.

The Impact of Future Rate Rises

Roy Morgan's analysis indicates that if the RBA were to enact another interest rate hike next month, pushing rates up to 4.35%, approximately 30.2% of mortgage holders would find themselves classified as "at risk". And if two further rate rises occur, bringing rates up to 4.60%, this percentage would rise to 30.7%.

It is important to note that Roy Morgan's model assumes all other factors remain constant, making it a relatively conservative estimate. Should unemployment rates rise significantly, the overall mortgage stress level could worsen even further.

Rising Mortgage Interest Charges

Recent data released by the Commonwealth Bank of Australia (CBA) has revealed a concerning trend. Despite the RBA maintaining interest rates since June, average mortgage interest charges have continued to increase.

This trend is primarily driven by the expiration of fixed rate mortgages. From January to June 2023, approximately $34 billion worth of fixed rate mortgages came to an end, allowing lenders to adjust their rates accordingly. Additionally, it is estimated that a further $52 billion worth of fixed rate mortgages will expire between July and December 2023.

This means that by the end of this year, around 85% of the RBA's rate hikes will directly affect borrowers, compared to the current estimate of 60%. Consequently, Australian households will be faced with the highest percentage of their income allocated to debt repayments on record by mid-2024.

Future Outlook and Factors at Play

The forecast for mortgage stress is gloomy, even if the RBA decides to keep the official cash rate unchanged. The combination of rising unemployment rates and the expiration of fixed rate mortgages will continue to exacerbate the situation.

In light of these circumstances, it is crucial for Australian homeowners to proactively manage their finances and explore strategies to alleviate mortgage stress. Seeking professional advice and exploring refinancing options may provide much-needed relief and a path towards financial stability.