Is your mortgage safe from a recession? Why most Aussies are in good shape – realestate.com.au

Households are currently managing their mortgage debt comfortably and there is an opportunity to stay ahead of potential economic downturns.

The Reserve Bank of Australia’s (RBA) latest Financial Stability Review, published earlier this month, paints a positive picture of household resilience. It also shows that in a major economic downturn, most households would still be able to pay off their mortgages and retain equity.

It’s promising news for Aussies, who have felt the pressure of higher living costs in the years since Covid and diligently weathered tough times before finally feeling some interest rate relief earlier this year.

The study shows that housing debt is less than $3 trillion, while the total value of homes nationwide is $11 trillion. Both the RBA and the Council of Financial Regulators agree that risks in the housing market are currently under control.

Despite this, there are still concerns about how lending quality could deteriorate if interest rates continue to fall.

Households have become more willing to take on additional debt this year as interest rate cuts in February, May and August increase borrowing capacity and boost confidence. At the same time, new opportunities in the property market are opening up for buyers of all levels, largely thanks to the government’s generous expansion of the Home Guarantee Scheme. Under the new terms, buyers of any income level can now enter the market with a 5% down payment.

The plan, which has been criticized by many, is expected to take competition in the tense housing market to a new high, boosting house prices, which are already at record levels.

While many investors and first home buyers are expected to join the mainstream sellers and buyers vying for more space in the market, mortgage holders must consider the risks. Both the government and the RBA can easily be persuaded to tighten macroprudential and fiscal policies where necessary if inflation continues to rise and prices become unstable.

Naturally, highly leveraged borrowers (those with high loan-to-value or loan-to-income ratios) are the most vulnerable when it comes to unexpected interest rate changes, making them the least resistant in the event of a recession.

The research shows that highly indebted borrowers are still the most likely to fall into arrears; Although this has decreased over the past 12 months, there are more payment arrears than before the pandemic.

With inflation risks subsiding over 2025, September National Accounts data from the Australian Bureau of Statistics confirms that 2024-25 was the weakest financial year for growth in Australia since the early 1990s, with the exception of 2019-20.

Despite this, the data shows that household spending has increased, while Australians have benefited from the three interest rate cuts announced.

Household wealth, contribution to growth, quarterly

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The RBA cut cash rates by 0.25% in February, May and August, with scheduled mortgage payments falling accordingly.

However, many households are still making additional repayments and even scheduled payments remain above pre-pandemic levels.

The RBA figures show that the majority of households with a variable home loan have a buffer in their compensation or redraw accounts. The equity positions of mortgage providers are also strong; the research shows that less than 1% of households currently have negative equity.

On the other hand, 0.7% of borrowers are short on cash flow and have a pre-pandemic buffer of six months or less.

If interest rates continue to fall throughout the year, as still forecast by the RBA, even fewer borrowers will be in deficit as real wage growth is also expected to pick up.

The RBA is also confident that unemployment will stabilize after the recent spike.

However, could we be at the end of the RBA’s rate cut cycle? Australia’s largest mortgage lender, the Commonwealth Bank, thinks so. National Australia Bank backs a similar forecast: that interest rates will be maintained until the middle of next year to help squeeze more growth out of the economy.

Source: Australian stock exchange

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As the Australian economy struggles to maintain momentum, the RBA’s next shapshot on the health of mortgage holders could paint a very different picture.

But for now, on the whole, the Australians appear to be in a comfortable enough position.