For those of us living from month to month, the news that almost half of all bank borrowers in Australia could be at risk of defaulting on their loans in just three months if they experience “shock” to their income or expenses is particularly concerning.
The new figures, released off the back of successive interest rate hikes by the Reserve Bank of Australia (RBA) in its April Financial Stability Review may fill us with anxiety but it is important to be aware of the situation and not take an unforgiving view of those who find themselves in this situation.
The announcement of the cash rate being lifted to 4.10 per cent on Tuesday came as a surprise to the market and economists who were expecting a pause in June. Despite the majority of borrowers being able to handle another hike, the news was received with shock by many.
The report showed people who took out loans and had less than three months of loan payments saved up to cover potential prepaid payments were in danger of not being able to make their loan payments.
“Around 40 per cent of loans have less than three months of prepayment buffer, even though many borrowers have significant buffers,” the RBA report found.
The report revealed that a prepayment is payment of a loan instalment prior to its due date, with a buffer representing funds that could be temporarily accessed in the event of a decrease in income to continue meeting repayments.
Additionally, it projected that with the current cash rate having surpassed 3.75%, accompanied by modest growth in borrowers’ incomes and a decrease in overall unemployment, this trend would stay in effect.
