July 13, 2024


The Intersection of Information and Insight

Stop talking about mortgage stress

5 min read

It’s time that we all stopped talking about mortgage stress.

It’s been a hot topic over the last year and a half, following a spate of interest rate hikes by the Reserve Bank propelling mortgage rates to heights unseen since late 2011.

There’s no denying that some first-time homeowners who capitalized on record-low interest rates offered during Covid and bought property at the peak of the market in late 2021 are now moving onto a new variable interest rate higher than the buffer applied by their lender when they took out the loan.

But let’s pause and consider the bigger picture: the notion of ‘mortgage stress,’ emblematic of a struggle to meet mortgage repayments, is not the ubiquitous predicament it’s often made out to be.

Similarly, the dreaded “fixed rate mortgage cliff” — where the hordes of mortgage holders who ‘‘fixed’’ in the low rate Covid period would battle to pay freshly elevated monthly bills – has also failed to materialise.

Here’s what happened to the forewarned “mortgage cliff”.

Interestingly National Australia Bank says this riskiest cohort of customers – the ones breaching their serviceability buffers – are not showing any more signs of mortgage stress than the rest of its home loan book.

In fact, at its full-year results, the bank revealed that while there has been a concern for much of the year that some borrowers on high-risk loans would fall over the so-called “fixed rate mortgage cliff” as their fixed rates reset, this just hasn’t materialised.

“To date, early arrears trends for loans originated during a period of low-interest rates, the 2020 and 2021 vintages, are not dissimilar to earlier vintages,” the bank said in its presentation slides.

Is this further proof that the ‘mortgage stress’ and ‘mortgage cliff’ drama have been overplayed?

Maria Trinci, a financial services partner at KPMG told the Australian that the major banks have reported a modest rise in arrears, which suggests that interest rate rises and the erosion of savings buffers may be starting to impact consumers.

“However, this rise ­remains small and from a record low base, demonstrating the resilience of Australian consumers.”

In fact, mortgage stress metrics across all major banks are still lower than pre-pandemic levels.

Each year the banks release results reporting an impending drama where mortgage holders are expected to fold under the pressure of higher rates.

This time last year, The Australian reported, “a yawning gap between the hard numbers and the gloom and doom among forecasters”, for example.

These borrowers have managed to accumulate additional savings or pay off more of their mortgage during ultra-low rates.

And those who have faced a stickier transition to higher variable rates have been helped by strong competition between lenders undercutting each others’ rates to win customers who are refinancing.

At the same time, the Reserve Bank’s 4-month pause on its interest rate hikes has helped mortgage holders catch up with rising inflation.

Mortgage Stress

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