Mortgage holders collectively coped with paying a record amount of interest in the final three months of 2022.
They paid $3.5 billion of interest to banks in the December quarter – 53 per cent more than just over a year earlier, when interest costs were the lowest on record.
Rising wages and comfortable levels of savings meant borrowers could handle the pain – then at least.
The portion of banks’ mortgage debt deemed “non-performing” remained low at 0.3 per cent in December, even though it rose from 0.2 per cent where it had been for most of the prior 15 months.
Non-performing loans include those more than 90 days overdue and ones that are impaired – where something happens to make a bank believe it won’t receive repayments it’s entitled to.
Other than for a short time in 2020, the non-performing housing loan ratio has generally hovered at 0.2 or 0.3 per cent since 2015. Before then, it got as high as 1.2 per cent.
Ahead of stopping repayments, a stressed mortgage holder may opt to only pay interest on their loan, instead of interest and principal.
In December, the value of “interest-only” mortgage debt held by banks was the lowest it’s been since Reserve Bank records began in 2016, at $50.5b.
At $20.9b, 8 per cent of owner-occupier debt was interest only, while 33 per cent ($29.7b) of investor debt was interest only.
Mortgage holders’ collective resilience in late 2022 might be unsurprising given how much households saved when interest rates hit rock bottom following the onset of Covid.
Households saved $6.9b in 2022 and $17.8b in 2021 – much more than pre-pandemic, when they tended to save nothing at all.
Record levels of wage rises have also provided mortgage holders with a buffer in the face of rising living costs.
Nonetheless, the question is, how many mortgage holders will struggle to absorb further cost increases over the next year or two.
With around half the country’s mortgage debt due for refixing this year, increasing numbers of borrowers will face higher interest costs.
Indeed, the average interest rate paid on the country’s stock of fixed and floating mortgage debt was only 4.19 per cent in November. This was a couple of percentage points below the rates people taking out new mortgages were being charged at the time.
The recession the Reserve Bank is engineering in an attempt to curb inflation will also see thousands of people lose their jobs.
While stress isn’t visible in the bank mortgage lending data, Centrix managing director Keith McLaughlin believes it’s starting to emerge in the broader bank and non-bank consumer debt data.
He said people will prioritise repaying debt for housing, then cars, then credit cards, then personal loans, and finally buy-now, pay-later.
Indeed, he started seeing an uptick in stress among borrowers meeting repayments for lower-priority obligations about six months ago.
McLaughlin said that over the past five or six years, arrears had been trending down. While current levels aren’t terrible, the concerning aspect is that the trend has changed.
Furthermore, McLaughlin couldn’t see a “circuit breaker” in the immediate future, with high inflation and interest rates expected to take some time to abate.