Home loan arrears set to rise, RBA warns

In its April 2020 Financial Stability Review, the Reserve Bank of Australia (RBA) reiterated its stance that the level of household debt and higher house prices are enduring risks for the Australian financial system.

While some households may be able to draw on significant financial buffers, including substantial mortgage prepayments, the RBA said many highly indebted households would have only small buffers.

These households would be more vulnerable to lost income.

“Repayment deferrals ‘holidays’ being offered by the banks and the government’s recently announced wage subsidy should both help avoid large increases in arrears,” the RBA said in its review.

Most households entered this challenging period in good financial health, with surveys showing most households had enough liquid assets to cover basic living expenses and current obligations, such as mortgage and rent payments, for three months.

Households with mortgage debt usually had sizable liquidity and/or equity buffers. Among these borrowers, over half of these loans had enough payments to service their loan repayments for at least three months.

However, the RBA stated there were certain segments of vulnerability before the pandemic, with some households having less liquidity to manage reductions in income.

“Surveys indicate that about one in five households only have enough liquid assets to get from one pay period to the next,” the RBA warned.

“These liquidity-constrained households are typically young, twice as likely to be renting and twice as vulnerable to unemployment compared with other households.”

Among households with mortgage debt, just under a third of mortgages have less than one month of prepayments, and about half of these are particularly vulnerable to a sudden and sharp drop in income.

Renters also feel the pinch

More than one-third of renting households typically report in surveys they have experienced financial stress in a given year, such as difficulty paying bills or skipping meals.

The most vulnerable are those facing unemployment risk such as casual workers and those in industries most affected by the coronavirus containment measures, such as accommodation and hospitality services.

These workers are more likely to rent and more likely to have liquidity constraints.

However, increasing financial stress among renters does not pose direct risks to the banking sector because these households usually hold little debt.

“But they pose indirect risks if they have trouble paying rent and their landlords in turn have trouble making their own debt repayments,” the RBA said.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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