Borrowers are by and large dealing with higher interest rates without falling too far behind on mortgage repayments but a fall in house prices could spell trouble for many Australians.
The Reserve Bank of Australia said the nation’s financial system was in relatively good health in its half-yearly financial stability review on Thursday.
Most mortgage holders have seen minimum repayments rise by between 30 per cent and 60 per cent since May 2022 but high cash buffers and low unemployment have left borrowers well-placed to pay off their debts.
Reserve Bank governor Michele BullockCredit: Dominic Lorrimer
The Reserve Bank found a larger-than-expected fall in employment would increase the rate of borrowers in mortgage arrears but not enough to threaten lenders. Despite a gradual softening in the job market, conditions remain tight.
Even if borrowers fall behind, few risk making a loss as they can sell their property to repay their loans in full as a last resort.
The central bank said only around 0.5 per cent of loans in arrears are estimated to be in negative equity, where the loan amount exceeds the value of the property, meaning they would make a loss if they defaulted.
But if property values drop, many more mortgage holders could fall into negative equity.
In a severe downside scenario envisaged in the review, where house prices fall by 30 per cent, the share of loans in negative equity would increase to nine per cent, although those losses would only be realised if borrowers were unable to service their loans.
However, with the Reserve Bank board tipped to start cutting interest rates within the next six months, the chances of a dramatic fall in house prices is slim.
AAP
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