Australian mortgage customers have revelled in low interest rates.
Australian mortgage customers have revelled in low interest rates.

One in three have no home loan buffer

HOUSEHOLD debt in Australia has shot up and as many as one in three home loan customers have little or no buffer on their mortgage repayments.

The number of people carrying large debts has also climbed and the nation's personal debt levels are now among the worst of those in advanced economies, the Reserve Bank of Australia's biannual Financial Stability Review has outlined today.

Some home loan customers have little or no buffers on their mortgages. Picture: iStock
Some home loan customers have little or no buffers on their mortgages. Picture: iStock


The review runs the microscope over the nation's finances and despite some households struggling, a large portion of mortgage borrowers are now well ahead on their loans with decent-sized balances tucked away in their offset accounts and redraw facilities.

This is around 18 per cent of outstanding loan balance or more than 2.5 years of scheduled repayments.

But on the flip side one in three mortgage customers are less than one month ahead of their loans so if rates rise these borrowers have virtually no buffer to fall back on.

Reserve Bank of Australia governor Philip Lowe kept the cash rate at 1.5 per cent this month. Picture: AAP
Reserve Bank of Australia governor Philip Lowe kept the cash rate at 1.5 per cent this month. Picture: AAP


The review points out that this does include fixed-rate mortgages which usually have tougher restrictions on allowing customers to pay extra, or new borrowers who have had little time to build up a decent-sized buffer.

It warns: "Some borrowers with new mortgages are yet to accumulate prepayments and so would be vulnerable to income falls.

"Liaison with the banks suggests that there is a small share of borrowers who have not accumulated prepayments despite having had their loan for some time and may have

little margin for unexpected increases in living expenses or income falls."

The ratio of total household debt to income in Australia has risen by 30 percentage points to almost 190 per cent - a significant climb after barely moving in the past decade.

"Australia's household debt-to-income ratio is high relative to many other advanced economies, including some that have also continued to see strong growth in household lending in the post-crisis period, such as Canada, New Zealand and Sweden," the review states.

Household debt in Australia is climbing and is among the worst in the world. Picture: iStock
Household debt in Australia is climbing and is among the worst in the world. Picture: iStock


It also warns there are many home loan customers who are coming to the end of an interest-only payment periods - which is often five years - and they will be hit with a sizeable jump to their repayments if they are forced to switch to principal and interest repayments.

"While most of these borrowers appear well placed to handle this change, liaison with banks suggests a small minority will face difficulty affording the higher scheduled payments."

Most interest-only loans are due to convert to principal and interest loans between 2018 and 2021 and this is expected to including around $120 billion per year or about 30 per cent of current home loans still being paid off.

The tightening of lending standards enforced by the banking regulator, the Australian Prudential Regulation Authority has helped reduce the impact of customers who eventually have to switch to higher repayments.

sophie.elsworth@news.com.au

@sophieelsworth



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