Context: the structural squeeze

Australia’s demographic reality is colliding with household balance sheets. A growing cohort is reaching retirement age with outstanding mortgages and limited capacity to absorb shocks. Cost-of-living pressures remain elevated: the ABS Selected Living Cost Indexes recorded rises between 2.3% and 4.2% in the 12 months to the December 2025 quarter, with mortgage interest charges captured within insurance and financial services. Economists expect a “higher-for-longer” interest-rate path and a slow growth backdrop in 2025, reinforcing stress for indebted older households, as reported by ABC News’ new-year outlook. SMEs are also bracing for slower demand and higher input costs, compounding the feedback loop on employment and income resilience.

For banks, the immediate exposure is arrears and loss given default in older-borrower segments; for super funds, it is retirement adequacy and drawdown behaviour; for retailers, discretionary spend is at risk as older customers prioritise mortgage servicing. Competitive dynamics in banking are shifting too: the Council of Financial Regulators (CFR) has recommended increasing the cap on covered bonds from 8% to 12% of Australian assets—an important potential lever to lower term funding costs and improve product options for vulnerable cohorts.

Decision: pivot from reactive hardship to proactive resilience

Our composite case synthesises steps several Australian financial institutions are exploring: a mid-tier bank (“the Bank”) reframed ageing-borrower exposure as a cross-enterprise priority. The executive decision was threefold:

• De-risk the book by moving from reactive hardship management to early, data-led outreach for customers aged 55+ with rising repayment-to-income ratios.
• Reprice and redesign products to smooth cash flows—offering transparent, longer-term fixed/part-fixed options and low-friction term extensions, supported by cheaper wholesale funding should the covered-bond cap be lifted.
• Institutionalise responsible AI to detect risk signals while complying with Australia’s AI Ethics Principles (fairness, privacy, accountability) and drawing on governance practices from the Australian Taxation Office’s AI oversight model.

Implementation: funding, product and responsible AI

Funding strategy. Treasury modelled the impact of a potential covered-bond headroom increase (as recommended by the CFR). By shifting an incremental slice of prime mortgages into covered bond pools, the Bank expected a 15–30 bps reduction in marginal term funding versus senior unsecured, subject to market conditions. Savings were earmarked to underwrite longer-dated fixed and part-fixed offers for customers 55+, creating payment certainty through retirement transition.

Product architecture. The lending team introduced three levers: (1) low-fee term extensions of 3–5 years to reduce monthly repayments; (2) partial annuitisation to align with retirement income flows; and (3) a guarded pathway to equity release via referral partners for appropriate cases, with stringent suitability checks.

Responsible AI early-warning system (technical deep dive). A cross-functional squad built a risk-detection engine with fully auditable pipelines:

• Features: transaction classification (utilities, groceries, health), volatility measures, repayment buffers, income source stability, and external market signals (mapping ABS living cost indexes to categories).
• Models: gradient-boosted trees for short-term arrears probability, calibrated with monotonic constraints to avoid counterintuitive risk jumps.
• Fairness and privacy: Sensitive attributes (age) were excluded as drivers of adverse outcomes; the system used age only to tailor support communications, not to restrict access. Model documentation, human-in-the-loop reviews and appeal channels mirrored the ATO’s governance emphasis on transparency and accountability from the government’s 2024 AI consultation response.
• Deployment: A weekly watchlist triggered personalised, plain-English outreach offering term extensions, budget coaching and fixed-rate options. Outcomes were tracked with A/B tests to validate impact.

Change management. Branch and contact-centre staff were trained on empathetic conversations and non-commissioned solutions. KPIs shifted from raw sales to “sustainable account outcomes.”

Results: modelled impact and business case (illustrative)

To avoid overstating outcomes, the Bank’s business case used conservative assumptions based on public data and internal history. For a $12 billion owner-occupied book with 18% of balances held by customers aged 55+, the model projected:

• Arrears reduction: Early outreach reduces 90+ days past due in the 55+ segment from 1.3% to 0.8% over 12 months (–50 bps). On $2.16 billion exposure, this equates to roughly $10.8 million less in non-performing balances.
• Expected credit loss (ECL): With a 20% loss-given-default assumption on the incremental non-performers, ECL falls by about $2.2 million annually.
• Funding cost pass-through: A 20 bps saving from greater covered bond utilisation, if realised, could be shared 50/50: 10 bps margin preserved, 10 bps rate relief to customers, improving retention and goodwill.
• Retention and cross-sell: Tailored support lifts 12‑month retention by 150 bps in the 55+ cohort and increases take-up of fee-free term extensions to 22% of eligible customers, based on controlled pilots.
• Operational efficiency: Targeted outreach reduces inbound hardship calls by 12%, freeing adviser capacity for complex cases.

Note: Figures are indicative scenario outputs used for planning and may vary with macro conditions, including the interest-rate path that ABC News characterised as a slow grind in 2025.

Lessons for leaders

• Segment by vulnerability, not just value. A cohort-based risk lens (e.g., repayment-to-income plus living-cost sensitivity) beats blunt age thresholds.
• Funding matters as much as underwriting. The potential increase in the covered-bond cap can be a competitiveness lever; treasury and product teams should plan joint pass-through strategies.
• AI needs governance muscle. Australia’s AI Ethics Principles and public-sector exemplars (like the ATO’s governance approach) offer a ready-made scaffold for model risk, documentation and appeals.
• Design for dignity. Scripts, fee waivers and non-commissioned outcomes build trust and reduce complaints—an intangible that becomes tangible in lower churn and arrears.
• Measure what you move. Track arrears, ECL, retention, and customer wellbeing proxies (e.g., budget buffer growth) to close the loop.

Wider market implications

Banks: Early movers can translate cheaper wholesale funding and lower ECL into pricing flexibility and share gains in the 55+ segment. Super funds: Expect more members with mortgages at retirement; integrate advice pathways with lenders to optimise drawdowns and housing decisions. Insurers: Older customers under financial strain may lapse or downshift cover—opportunity for micro-covers aligned to retirement budgets. Retailers and utilities: Payment plans and loyalty tiers that preserve cash flow will help maintain spend as older households rebalance budgets. SMEs: Anticipate softer discretionary demand; stress-test cash flows and diversify customer mix.

Future outlook and roadmap (12–24 months)

• Policy watch: Monitor the government’s response to the CFR recommendation on covered bonds—cap changes would materially alter banks’ term funding curves.
• Macro path: A slow-growth, higher-for-longer rate setting keeps pressure on indebted retirees; scenario planning should include persistent cost-of-living bands similar to ABS LCI ranges.
• Data collaboration: Privacy-preserving data sharing between lenders, super funds and accredited advisers could improve retirement outcomes—anchored in consent and Australia’s AI ethics guardrails.
• Product innovation: Growth in part-fixed, longer-tenor loans, and carefully governed equity-release partnerships, with clear suitability criteria.
• Capability build: Invest in explainable ML, model monitoring, and frontline coaching; align incentives to sustainable outcomes, not short-term sales.

For boards, the message is simple: ageing-with-debt is now a mainstream risk and a strategic opportunity. Those who combine disciplined funding, responsible AI and dignity-first product design will not just protect margins—they’ll earn the loyalty of customers navigating the most financially fragile years of their lives.