Financial stress building as 'defacto' rate hike looms

The warning came as leading market economist David Bassanese said more than 1.3 million borrowers due to come off fixed rate mortgages this year and next faced the equivalent of five 0.25 of a percentage point increases to their repayments.

"[This] defacto policy tightening, at least in the mortgage sector, is equivalent to around one third of the policy tightening already seen over the past year," the Betashares chief economist said, .

In its latest assessment of the financial system, the RBA said household expenses had grown "considerably" in the past year because of rising interest rates and high inflation and the burden had fallen particularly heavily on those on lower incomes or who have recently bought their first home.

"Some households and businesses are already experiencing financial stress, and the squeeze on household budgets is likely to continue for some time," the Reserve Bank said.

The central bank warned that about a third of all mortgage holders will face "large discrete increases in their loan payments" during this year and 2024 as their home loan switches from a fixed to a variable rate.

RBA governor Philip Lowe told the National Press Club on Wednesday that many of these borrowers have had time to plan for the impending switch, with many building up considerable savings in offset and redraw accounts.

But a lot of households have progressively drawn down on these buffers as repayments have climbed, and the central bank said around 40 per cent of mortgagors had less than three months of repayments set aside.

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This growing pool of low-buffer loans were particularly vulnerable because the loss of a job or a cut in hours would reduce their ability to service their loan and many had already significantly reined in their spending and had limited financial capacity to absorb more increases in payments.

"There is a group of borrowers who, even if they cut back sharply on non-essential spending, will be at risk of exhausting their savings buffers within six months [unless they can further adjust their spending or income]," the RBA said. "Those on lower incomes and recent first home buyers are over-represented in this group."

A further risk is the proportion of fixed-loan borrowers who will be unable to shop around for a better deal when their term ends because higher interest rates have eroded their borrowing capacity.

The RBA estimates that currently about 16 per cent of borrowers are in this position but that proportion could increase to 20 per cent if mortgage rates were to lift by a further 1 percentage point.

The central bank said recent home buyers were particularly vulnerable, especially those who had borrowed at close to their maximum capacity when rates were low.

The strong employment market has been important so far in helping households manage rising living costs but unemployment is expected to rise as the economy slows.

The RBA said its analysis showed that around half of families with a mortgage who lost a job would be unable to sustain essential spending and mortgage repayments for more than six months without cutting back on purchases of non-essentials.

"An increase in the share of households and firms falling into arrears on their loans is anticipated by lenders," the central bank said, but added that any increase in non-performing loans would come from a very low level and the share of home loans at or close to negative equity was "negligible".

Overall, the central bank assessed that although Australia was not immune to offshore bank failures and other shocks, the nation's financial system was "in a strong position and is well placed to continue supporting the domestic economy".