Raid on savings brings mortgage pain closer

afr.com:

Big bank investors are warning that Australia has not yet passed the risk of the so-called mortgage cliff after household savings, which have sheltered borrowers from the worst of high inflation and rising interest rates, recorded the first fall in 16 years.

Household deposits dropped by $6 billion in the June quarter, according to the Australian Bureau of Statistics, while the household savings ratio dived for the seventh straight quarter to 3.2 per cent, the lowest level since 2008.

Australia is halfway through a $350 billion wave of fixed-rate home loans transitioning to more expensive variable rates. Peter Rae

However, Commonwealth Bank said last month that delinquencies were still low at 0.92 per cent for 30-day arrears, and 0.43 per cent for 90-day arrears as of June. This is despite the Reserve Bank lifting interest rates 4 percentage points to 4.1 per cent since May 2022 as it tries to tame inflation.

The nation is also halfway through a $350 billion wave of fixed-rate home loans transitioning to more expensive variable rates, which fuelled fears it could create a “mortgage cliff” where borrowers who took out loans when rates were at record lows would struggle once they moved to higher rates.

Investors Mutual portfolio manager Michael O’Neill said higher savings had protected borrowers from the worst effects of the rising interest rates so far, but argued it would eventually turn like it had in the United States.

“The US peaked at a bit over $US2 trillion [$3.14 trillion] of savings, or about 10 per cent of GDP. Our peak was at a similar level of savings as a percentage of GDP, but [US savings] have run down to around 1 per cent now,” he said.

Mr O’Neill said that because interest rates and inflation started