How households are placed as interest rates rise
During COVID-19, many households have built savings buffers indicating they’re able to manage higher mortgage repayments, according to both CBA and Gateway Bank.
A period of record-low interest rates, combined with reduced consumption amid COVID-19 restrictions, has enabled many to stow money away.
According to the latest RBA Financial Stability Review, securitisation data suggests the median excess payment buffer for owner-occupiers with a variable-rate mortgage was around 21 months’ worth of scheduled repayments in 2022 – up from around 10 months at the onset of the COVID-19 pandemic. For those with lower initial repayment balances, RBA noted the increase was much smaller.
“Indebted owner-occupier household saving is largely in the form of payments into mortgage offset and redraw accounts,” the RBA said in the report. “The flow of these payments in excess of scheduled requirements was equivalent to around 2.5% of household disposable income in the December quarter of 2021, compared with an average of around 1% in the two years preceding the pandemic.”
CBA general manager of third-party banking Adam Croucher (pictured above) said one in two CBA customers were more than three months’ ahead of their scheduled repayments.
“We continue to lend responsibly in the current environment and home loan arrears rates remain low at 0.51% as at March 31,” Croucher said. “Furthermore, our serviceability assessment includes buffers to protect our customers against repayment shocks arising from increases in their customer interest rates of a minimum of 3%.”
As the official cash rate of 0.35% came off a record 10-basis-point low in May, the first rise in almost 12 years, some home loan customers haven’t had their repayments increase.
Croucher said the bank encourages its customers to make additional payments if they can, to help them repay their loan sooner.
In addition to the standard variable rate home loan, CBA’s fixed rate home loan enables customers to repay up to $10,000 each year of the fixed rate term, without incurring fees.
“Eligible CBA customers looking to regularly access their additional savings but still pay off their loan sooner, can access an everyday offset account,” Croucher said.
An offset account is linked to an eligible home loan or investment home loan, enabling customers to save money on interest, by reducing the time it takes to repay their mortgage.
Brokers with clients who are falling behind on their repayments, or are at risk of doing so, can put them in touch with the CBA financial assistance solutions team.
Read more: CBA offers lower variable rate for green homes
Gateway Bank head of customer operations Zeb Drummond (pictured below) said at a portfolio level, members’ savings balances grew by 25% over the last 18 months.
The impact of lockdowns on discretionary spend has helped savings to grow, indicating many borrowers are well-placed to manage higher repayments.
“Our data shows that over 40% of our borrowers have sufficient deposits to cover over 19 months of repayments, and 62% have over three months’ buffer,” Drummond said. “However, we do understand that a rising interest rate environment can put borrowers under stress and pressure and encourage borrowers who may be feeling this to talk to their lender sooner rather than later.”
Over the last couple of years, the customer-owned bank has observed more borrowers shopping around for a better rate and taking advantage of the many cash-back offers in the market.
“In the past six months or so, we have really seen an ebb and flow into the products they are looking for,” Drummond said. “At the turn of the year, we saw a huge increase in applications for fixed rate loans as media coverage of potential rate increases led borrowers to lock in at low rates. This quickly reverted to variable as the market moved their fixed rates.”
Basic home loans have taken a back seat to loans linked to offset, as borrowers have looked to leverage increased savings to help improve their loan position, Drummond said.
Heading into a rising rates environment, he suggests brokers continue to do what they do best: stay close to their clients and their individual circumstances. Those facing challenges are urged to speak to their lender as soon as possible to work through potential solutions.
