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‘Mortgage stress’ set to rise as interest rates continue to increase during second half of 2022

Source: Roy Morgan Single Source (Australia), average interviews per 3 month period April 2007 – March 2022, n=2,685.
Base: Australians 14+ with owner occupied home loan.
New research from Roy Morgan shows an estimated 762,000 mortgage holders (17.5%) were ‘At Risk’ of ‘mortgage stress’ in the three months to March 2022. This period encompassed the ‘Omicron wave’ of COVID-19 throughout Australia although interest rates in the first few months of 2022 were still at a record low level of only 0.10%.

The good news is that the proportion of mortgage holders considered ‘At Risk’ of mortgage stress early in 2022 was at less than half the rate at the height of the Global Financial Crisis in early 2009 when there was a peak of 35.6% of mortgage holders considered ‘At Risk’.

‘Mortgage stress’ dropped to record lows during 2021 as record low interest rates, tens of billions of dollars of Government stimulus, and considerable measures taken by banks and financial institutions to support borrowers in financial distress all combined to reduce the number of mortgage holders considered ‘At Risk’ to fewer than 600,000 for the first time.

There has been a similar trend for mortgage holders considered ‘Extremely At Risk’, with only 10.7%, or 438,000, in this group in the three months to March 2022, close to a record low.

However, there has been a big change in the last few months as concerns about inflation have increased and the RBA has commenced an interest rate hiking cycle. The RBA increased interest rates for the first time in over a decade in early May by 0.25% points to 0.35% and in early June by 0.50% to 0.85%, the largest increase to interest rates in over two decades since February 2000.

Mortgage Stress – Owner-Occupied Mortgage-Holders

Source: Roy Morgan Single Source (Australia), average interviews per 3 month period April 2007 – March 2022, n=2,685.
Base: Australians 14+ with owner occupied home loan.

Mortgage Risk set to increase to nearly 1-in-5 mortgage holders over next few months

The RBA decision to increase interest rates by 0.75% over the last two months means official interest rates are now at 0.85% - and set to move higher still over the next few months.

Roy Morgan has modelled the direct impact of the existing interest rate increase of 0.75% on mortgage holders as well as the expected interest rate increases of 0.5% during each of the next two months.

The interest rate increases already made by the RBA mean that 18.3% of mortgage holders, 796,000, would now be classified as ‘At Risk’ – an increase of 34,000 on the original figure of 762,000 (17.5%).

If the RBA increases interest rates by 0.5% in each of the next two months this would mean 19.4% of mortgage holders, 843,000, would then be classified as ‘At Risk’ – an increase of 81,000. This would be the most mortgage holders classified as ‘At Risk’ since the March quarter 2021 just over a year ago.

Mortgage Risk at different level of interest rate increases

Source: Roy Morgan Single Source (Australia), January-March 2022, n=2,987. Base: Australians 14+ with owner occupied home loan.

How are mortgage holders considered ‘At Risk’ or ‘Extremely At Risk’ determined?

Roy Morgan considers the risk of ‘mortgage stress’ among Mortgage holders in two ways:

Mortgage holders are considered ‘At Risk’1 if their mortgage repayments are greater than a certain percentage of household income – depending on income and spending.

Mortgage holders are considered ‘Extremely at Risk’2 if even the ‘interest only’ is over a certain proportion of household income.

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1"At Risk" is based on those paying more than a certain proportion of their after-tax household income (25% to 45% depending on income and spending) into their home loan, based on the appropriate Standard Variable Rate reported by the RBA and the amount they initially borrowed.

2"Extremely at Risk" is also based on those paying more than a certain proportion of their after-tax household income into their home loan, based on the Standard Variable Rate set by the RBA and the amount now outstanding on their home loan.

Michele Levine, CEO Roy Morgan, says mortgage stress has been at new lows as record low interest rates and large levels of pandemic support from the Government and banks have protected those with home loans, but that looks set to change as interest rates begin to rise:

“The latest Roy Morgan data into the Australian housing market shows mortgage stress was near record lows early in 2022 with only 762,000 mortgage holders (17.5%) defined as ‘At Risk’ and just 438,000 (10.7%) defined as ‘Extremely At Risk’.

“However, these figures relate to the March quarter 2022, before the RBA began its first interest rate increasing cycle in more than a decade during the current June quarter 2022. The RBA has now lifted interest rates in consecutive months, by +0.25% in May 2022 and by +0.75% in June 2022 with official interest rates now at 0.85% - back to where they were in October 2019 before anyone had even heard of the ‘Coronavirus’ or ‘COVID-19’.

“If interest rates in the March quarter 2022 had been where they are now there would have been a further 34,000 mortgage holders classified as ‘At Risk’ (18.3% of all mortgage holders) and an additional 28,000 considered ‘Extremely At Risk’ (11.3%).

“It is expected that the RBA will continue to increase interest rates in the months ahead as Australia faces its highest level of inflation in over two decades. If the RBA increases interest rates by 0.50% at its July and August meetings this will mean official interest rates will have increased by 1.75% since early May.

“If the RBA does go through with these interest rate increases in the next two months there would be a further increase in the number of mortgage holders considered ‘At Risk’ to nearly one-in-five (19.4%) or 843,000 (an increase of 81,000). This would be the highest number of ‘At Risk’ mortgage holders since early 2021 – and with the prospect of further interest rate increases to come.

“It’s important to consider that interest rates are but one variable that determines whether a mortgage holder is considered ‘At Risk’. The variable that has the largest impact on whether a borrower falls into the ‘At Risk’ category is related to household income – which is directly related to employment.

“These figures suggest that as long as employment levels remain strong the number of mortgage holders considered ‘At Risk’ will not spike alarmingly over the next few months as interest rates are increased from the record low levels experienced during the last two years.

“The RBA’s latest Statement on Monetary Policy (SOMP) suggests inflation in Australia will peak at around 6% in the second half of this year. If this does happen and inflation pressures begin to reduce in the period after that this will reduce the likelihood of further increases to interest rates later this year and into 2023.”

For comments or more information please contact:
Roy Morgan - Enquiries
Office: +61 (03) 9224 5309
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About Roy Morgan

Roy Morgan is the largest independent Australian research company, with offices throughout Australia, as well as in Indonesia, the United States and the United Kingdom. A full service research organisation specialising in omnibus and syndicated data, Roy Morgan has over 70 years’ experience in collecting objective, independent information on consumers.

Margin of Error

The margin of error to be allowed for in any estimate depends mainly on the number of interviews on which it is based. Margin of error gives indications of the likely range within which estimates would be 95% likely to fall, expressed as the number of percentage points above or below the actual estimate. Allowance for design effects (such as stratification and weighting) should be made as appropriate.

Sample Size

Percentage Estimate

40%-60%

25% or 75%

10% or 90%

5% or 95%

1,000

±3.0

±2.7

±1.9

±1.3

5,000

±1.4

±1.2

±0.8

±0.6

7,500

±1.1

±1.0

±0.7

±0.5

10,000

±1.0

±0.9

±0.6

±0.4

20,000

±0.7

±0.6

±0.4

±0.3

50,000

±0.4

±0.4

±0.3

±0.2