Financial stress could be more endemic: RBA’s latest review concludes

The Reserve Bank’s (RBA) recently published 70-page Financial Stability Review makes for some sober reading, with the central bank outlining how higher inflation and increased mortgage payments will drain the cash flows and reserves of borrowers.

The RBA expects higher inflation and rising interest rates to make it difficult for some borrowers to meet debt payments, while a smaller cohort could fail to meet debt payments due to low savings and high debt.

But overall, the RBA concludes that households are "reasonably well-placed to adjust" to a period of higher interest rates, and most indebted households are well-placed to manage the recent increase in their housing and other living expenses.

Vulnerable borrowers

But despite sizeable spare income to meet debt and basic living expenses and strong employment growth, the central bank believes financial stress "could be more widespread if economic activity turns out to be much weaker than expected”.

The RBA’s latest review also flags first home buyers and low-income households as among the most “vulnerable borrowers” as it foreshadowed a cash squeeze that would deplete accumulated cash reserves.

One in five to feel the heat

After the recent 2.5% of interest rate increases, the RBA expects:

• 40% of variable rate borrowers won’t have to increase their mortgage payments.

• 15% won’t have an increase of payments of 20%-plus.

• But 20% – one in five – will face an increase in mortgage payments to 30% of their income.

However, if interest rates increased to 3.5% in line with market forecasts, 25% of all variable loan borrowers would have to pay 30% of their income on mortgage payments.

Highlights of the RBA's semi-annual review released today include:

• Global financial stability risks have increased, amid tighter financial conditions and rising uncertainty.

• Higher inflation and rising interest rates will make it difficult for some borrowers to meet debt payments.

• The risks from cyber-attacks and climate change continue to be a focus of financial institutions and regulators.