How Do Rising Interest Rates Affect Australian Families?

Australian families face a particularly harsh impact from rising interest rates compared to those in other countries. WHY? This is mainly due to the widespread use of variable-rate home loans in Australia.

Immediate Consequences of Rising Interest Rates

In Australia, any increase in official interest rates is quickly felt by households due to the prevalence of variable-rate loans. While only 15 % of Australian home loans are fixed-rate, the global average stands at 60 %, and it is nearly 100 % in the United States and Mexico. In these countries, borrowers only feel the effects of rate changes when they move properties, whereas in Australia, the impact is immediate, making interest rates a potent tool for influencing household budgets.

Increasing Mortgage Arrears With Rising Interest Rates

The immediate impact of rate hikes is evident in the rising mortgage arrears. CoreLogic research shows that mortgage arrears have increased from 1 % in September 2022 to 1.6 % in the most recent March quarter. Though this remains relatively low, it signifies a 60 % increase over 18 months.

Growth in Non-Performing Loans

The rise in arrears is mainly due to non-performing loans, which have increased to 0.93%. These are loans that are at least 90 days overdue or loans where the lender expects not to recover the full amount. This rate now exceeds the level at the onset of COVID-19 (0.92 %) and is above the historical average of 0.86 %.

What Contributes to Higher Arrears

Several factors contribute to the rise in mortgage arrears, including the sharp increase in the cost of borrowing. The average variable interest rate on owner-occupier home loans rose from 2.86 % in April 2022 to 6.39 % in March 2024. For a borrower with $750,000 in debt, this translates to an additional $1,600 per month in loan repayments.

Economic Strain on Households With Rising Interest Rates

In addition to higher interest rates, other economic pressures are affecting households. Rising living costs are taking a larger share of household income, taxes are at unprecedented levels, and the savings built up during the pandemic are being depleted. High levels of household debt, mostly in the form of housing debt, make families more vulnerable to interest rate fluctuations. Rising unemployment is also causing concern among Australians.

Asset-Rich but Cash-Poor Households

Australian households often find themselves asset-rich but cash-poor. Although property values may be increasing, many struggle to keep up with loan repayments. Fortunately, those who fall behind often have the option to sell their property and clear their debt.

Diminishing Risk of Negative Equity

According to the Reserve Bank of Australia (RBA), only about 1 % of residential properties in Australia have debt levels exceeding the value of the home. As housing values continue to rise, the risk of negative equity is decreasing.