Financial Stability Review – October 20235.3 Focus Topic: Indicators of Household Financial Stress

There is no universally accepted definition of the concept ‘household financial stress’, so the Reserve Bank monitors a broad range of indicators of the health of household finances in Australia. This Focus Topic provides an assessment of households’ financial health and the incidence of financial stress across different types of households. The main findings are:

  • Early indicators show that financial pressures have increased. Many households are facing a squeeze on their budgets and have had to make (in some cases, substantial) adjustments to their spending or saving patterns in light of the increase in inflation and interest rates over the past 18 months.
  • The incidence of severe financial stress has increased but remains low. The vast majority of households have had scope to make adjustments to their personal situation, including increasing hours worked, reducing their discretionary spending, saving less or reducing their stock of savings.
  • The group of borrowers at higher risk of falling into arrears on their mortgage remains small. Borrowers with low incomes, large loans relative to their income or property value, and low savings are particularly at risk.

The Bank monitors a broad range of indicators to assess household financial stress.

Definitions of financial stress vary, which reflects that different households can be in different stages along the spectrum of stress (Figure 5.3.1):[1]

  • Rising budget pressures can be an early indicator of stress. Budget pressures may cause households to worry about being able to pay their bills or build savings going forward, and force some to cut back on discretionary expenditures or look to increase hours worked.
  • Under severe financial stress is the more extreme end of the spectrum. Insolvent households are unable to service their debts or pay their essential bills out of their income and savings.

Some life events, such as illness or job loss, may push households into severe financial stress immediately, independent of the state of the economy. In other cases, financial stress can build gradually from milder to more severe forms as a household exhausts its options to respond to budgetary pressures. Some households may be able to ‘self-cure’ and exit financial stress – for instance, through hardship assistance from lenders or by selling assets to reduce their debts – however, this may involve substantial financial and personal costs (e.g. in the sale of the family home).

Figure 5.3.1: Spectrum of Financial Stress
Figure 5.3.1: A diagram depicting the intensity of financial stress, ranging from mild to severe. The diagram lists different experiences and feelings that households may be having across the spectrum, such as budget pressures, missing payments and becoming insolvent.

Financial stress first and foremost impacts people’s wellbeing but there can also be spillovers to the broader economy and financial system. Households in early stages of financial stress might sharply reduce their non-essential spending, which can contribute to or exacerbate an economic downturn. In extreme cases, financial stress can have implications for financial stability. Households in severe financial stress are unable to service their debts, which could lead to losses for lenders and – if sufficiently large and widespread – could cause them to reduce lending or to become financially stressed themselves.

The Bank therefore closely monitors a range of indicators for signs of financial stress. These range from early indicators of building financial pressures (such as households’ perception of their financial situation) to measures of more severe stress (such as loan arrears and other late debt payments). In addition to these directly observable indicators, the Bank analyses a range of surveys – such as the Survey of Income and Housing (SIH) by the ABS and the Melbourne Institute’s Household, Income and Labour Dynamics in Australia (HILDA) Survey – for a comprehensive assessment of households’ experiences with financial stress and their financial wellbeing. As these surveys tend to be available only with a substantial lag, the Bank complements this information with loan level data from the Securitisation System. We then estimate indebted households’ evolving financial positions in terms of:

  • spare cash flows – households’ income available after meeting housing costs and other essential expenditures
  • savings buffers – savings that can be drawn on when household income is not sufficient to meet housing costs and other essential expenditures.

A growing number of households are in early stages of financial stress, but a very small share are currently unable to service their debts.

High inflation and higher interest rates have reduced most households’ spare cash flow. In turn, a small but increasing share of households is likely to have to spend more than their incomes (see Chapter 2: Resilience of Australian Households and Businesses). Consistent with these broad-based budget pressures:

  • many households are making adjustments to their expenditure, as evidenced by slowing consumption growth
  • households’ sentiment of their current or future financial health has declined sharply since early 2022
  • the frequency of Google searches of terms related to household financial stress increased earlier this year to its highest level since the start of the COVID-19 pandemic in early 2020
  • financial counselling services such as the National Debt Helpline have seen increased demand for their services from the low levels seen during the pandemic (Graph 5.3.1).
Graph 5.3.1
Graph 5.3.1: A three-panel chart of indicators of household financial stress. The first panel shows consumer sentiment on family finances for the last 12 months and next 12 months have both declined. The second panel shows google searches on household financial stress which are at elevated levels. The third panel shows enquiries to the National Debt Helpline which have been growing since 2022.

At the other end of the spectrum, indicators of severe financial stress have also begun to increase, but they have remained at very low levels as measured by mortgage arrears rates (see Graph 2.2 in Chapter 2: Resilience of Australian Households and Businesses) and personal insolvencies (Graph 5.3.2).

Graph 5.3.2
Graph 5.3.2: A line graph showing the number of annualised personal insolvencies, which remain low.

Budget pressures and incidences of financial stress differ across households. Some households have been affected more by high inflation and higher interest rates and are therefore facing budget pressures more acutely.

Renters are generally more likely to experience financial stress but do not pose direct financial stability risks.

Timely, comprehensive and representative data on renters’ financial situations is hard to come by. Yet, many renters are likely to have been particularly impacted by the recent period of high inflation for the following reasons:

  • Renters tend to have lower incomes. Private survey data covering the period from February to July 2023 show that renters have substantially lower incomes than mortgagors across all age groups (Graph 5.3.3).[2] Renters have also been particularly impacted by recent large rent increases.[3] That said, some renters – particularly those on low incomes – are likely to have experienced stronger-than-average income growth (see Graph 2.3 in Chapter 2: Resilience of Australian Households and Businesses).

    Graph 5.3.3
    Graph 5.3.3: A bar chart showing median household income for mortgagors and renters by age group. For all age groups, renters have lower median weekly incomes.
  • Renters have substantially lower savings than mortgagors irrespective of their age (Graph 5.3.4).

    Graph 5.3.4
    Graph 5.3.4: A bar chart showing median liquid assets of mortgagors and renters by age group. For all age groups, renters have lower median liquid asset balances.

As a result, renters are much more likely to experience financial stress than other households. In 2021, renters were around twice as likely to face difficulties paying their bills and were around four to five times more likely to seek help from community services or family and friends (Graph 5.3.5).[4] Renters could also experience financial stress more severely if the labour market were to soften, as they tend to be more likely than mortgagors to lose work in economic downturns.[5]

Graph 5.3.5
Graph 5.3.5: One panel bar chart showing how many people, as a proportion of their tenure type, experienced a financial stress incident in 2021. The tenure types are outright owners and mortgagors and renters.

Even though renters are more likely to experience financial stress, they do not pose direct financial stability risks as they do not have material debts. That said, if a large number of renters were to default on their rental payments, this could adversely impact the cash flow of investors, particularly those who financed their investment property with debt. And, if renters were to sharply reduce their spending, this could contribute to a more material economic downturn.

Mortgagors are facing much higher interest costs, but the vast majority appear well placed to continue to service their debts.

Mortgagors tend to have higher incomes than renters and have historically been less likely to experience financial stress. More recently, however, borrowers – except those still on low fixed rates – have faced substantial increases in their mortgage costs, with the majority having seen their payments increase between 30 and 50 per cent since April 2022 (Graph 5.3.6, all loans).

Graph 5.3.6
Graph 5.3.6: Bar chart showing the distribution of changes in minimum scheduled payments for owner-occupier variable-rate borrowers between April 2022 and July 2023 for all loans, those with higher LTI and high LVR. Most of the distribution is between the 30 to 50 per cent change in minimum payments, with more of the distribution for higher LTI and high LVR borrowers in the higher buckets than all loans.

Mortgage payments represent an increasing share of borrowers’ income. The share of variable-rate owner-occupier borrowers devoting at least one-third of their (reported) income to their mortgage payments has increased sharply, from around 4 per cent in April 2022 to around 20 per cent in July 2023 (Graph 5.3.7). This share is the highest among low-income mortgagors (defined as the bottom quartile of mortgagor incomes – that is, borrowers with up to around $78,000 in household disposable income) at around 43 per cent.[6] By contrast, the share is around 8 per cent for borrowers in the highest mortgagor income quartile. Further, higher income borrowers can generally absorb the higher debt-servicing costs without becoming financially stressed because they tend to have significant income relative to essential spending needs (see Graph 2.8 in Chapter 2: Resilience of Australian Households and Businesses).

Graph 5.3.7
Graph 5.3.7: A bar line chart showing the share of variable-rate owner-occupier borrowers devoting at least 30 per cent of their reported income to their mortgage payments by income quartile. Dots represent shares in April 2022 whereas bars are shares in July 2023. The share of borrowers with high loan-servicing-ratio has increased sharply from around 4 per cent in April 2022 to around one fifth in July 2023.

Borrowers with larger loans relative to their income (‘higher LTI’) or relative to the value of their property (‘high LVR’) are more likely to face financial stress.[7] Since interest rates increased in May 2022, higher LTI loans and high-LVR loans tend to have seen larger increases to their scheduled minimum payments compared with other variable-rate owner-occupier loans (Graph 5.3.6).[8] As a result, these borrowers are much more likely to struggle to meet their essential spending needs. About 25–50 per cent of higher LTI borrowers and about 15–32 per cent of high-LVR borrowers are estimated to have an income level not sufficient to meet their housing costs and necessary expenses, compared with 5–13 per cent for all variable-rate owner-occupier borrowers, depending on assumptions about essential expenses (Graph 5.3.8).[9]

Higher LTI variable-rate owner-occupier borrowers whose essential expenses and housing costs exceed their income tend to have only slightly lower savings buffers than all borrowers in a similar financial position (irrespective of the Household Expenditure Measure (HEM) used to capture essential expenses). By contrast, high-LVR borrowers tend to have substantially lower savings buffers and are hence most at risk of entering mortgage stress (Graph 5.3.9).[10] Consistent with this, higher LTI and in particular high-LVR borrowers have higher arrears rates than other borrowers (see Graph 5.2.3 in 5.2 Focus Topic: An Update on Fixed-rate Borrowers).

By contrast, other groups of borrowers do not appear to be materially more at risk and have broadly similar or lower arrears rates to other borrowers (see Graphs 5.2.2 and 5.2.3 in 5.2 Focus Topic: An Update on Fixed-rate Borrowers). These include:

  • Those who borrowed at low fixed or variable rates during the COVID-19 pandemic and are now on higher variable rates (accounting for 25 per cent of outstanding variable-rate owner-occupier loans by volume). The estimated share of borrowers in this group whose income does not meet their cost of living ranges between 8 and 18 per cent (depending on the measure of essential expenses used) – which is not significantly different to all other borrowers in a similar financial position. This is despite these borrowers having had less time to repay the principal on their loan and therefore often having larger loan sizes, and the fact that their borrowing capacity at loan origination was assessed at an interest rate below their current rate. Moreover, these borrowers have broadly similar savings buffers to other borrowers.
  • First home buyers. These borrowers tend to take out loans with high LVRs as saving for a deposit can be difficult; by contrast, previous home buyers tend to have accumulated equity in their properties.[11] Despite some recent first home buyers having higher LVRs (and hence lower equity in case of needing to sell if in stress), between about 6 and 14 per cent are estimated to have living costs that exceed their income, which is similar to all variable-rate owner-occupiers. This group also has similar savings buffers to other comparable borrowers.
  • Investors. While investors have seen similarly large increases in their interest payments compared with owner-occupier borrowers on the same interest-rate type, most are likely well placed to service their debts. This is because investors tend to have higher incomes and savings than other households and have seen their rental income increase strongly over the past year or so (albeit generally not sufficient to offset the increase in mortgage costs). Moreover, investors are more likely than owner-occupiers to sell their properties to avoid financial stress.
Graph 5.3.8
Graph 5.3.8: A bar chart showing the share of variable-rate owner-occupier borrowers with cost of living exceeding their income by different groups using the baseline and broader HEM. Higher-LTI or high-LVR borrowers are more likely to have an income level not sufficient to meet their total living costs than other borrowers.
Graph 5.3.9
Graph 5.3.9: A bar chart showing mortgage buffers relative to cash flow shortfalls for different groups of borrowers with cost of living exceeding their income using the baseline HEM. High LVR borrowers with cost of living exceeding their income tend to have substantially lower savings buffers.

Financial stress does not vary much across Australia. This is despite borrowers in some regions having seen larger increases in their loan payments (relative to their incomes) – for example, New South Wales and Victoria have the highest shares of borrowers devoting at least one-third of their incomes to their mortgage expenses. Housing prices (and thereby loan sizes) largely drive these differences. While the share of borrowers estimated to have their cost of living exceed their income is higher in these states, it is not significantly so, with the shares ranging between 6 and 16 per cent depending on HEM assumptions (Graph 5.3.10). In turn – and supported by the tight labour market across most of Australia – loan arrears remain relatively low, at less than 1 per cent across all states and territories (Graph 5.3.11).

Graph 5.3.10
Graph 5.3.10: A bar chart showing the share of variable-rate owner-occupier borrowers with cost of living exceeding their income by state using the baseline and broader HEM. The share of borrowers estimated to have cost of living exceed their income is higher in NSW and Vic than other states or territory.
Graph 5.3.11
Graph 5.3.11: Bar chart showing estimated arrears rates for each Australian state or territory, with a horizontal line representing the national average.


Adapted from Bullock M (2018), ‘Household Indebtedness and Mortgage Stress’, Address to the Responsible Lending and Borrowing Summit, Sydney, 20 February. [1]

Data are from RFI Global’s DBM Atlas that collects information on the financial position of around 26,000 Australian consumers through a variety of methods. [2]

Hanmer F and M Marquardt (2023), ‘New Insights into the Rental Market’, RBA Bulletin, June. [3]

Based on data from the HILDA Survey. [4]

RBA (2023), ‘Box B: Scenario Analysis on Indebted Households’ Spare Cash Flows and Prepayment Buffers’, Financial Stability Review, April. [5]

By comparison, the bottom quartile of all household incomes extends to around $50,000 (based on data from Wave 21 of the HILDA Survey, grown forward by WPI growth), reflecting that mortgagors tend to have higher incomes than other households. [6]

RBA (2021), ‘Chapter 5: Mortgage Macroprudential Policies’, Financial Stability Review, October. [7]

Higher LTI loans are defined as LTI greater than 4, which accounts for around 14 per cent of variable-rate owner-occupier loans. APRA considers loans with a total debt-to-income (DTI) ratio of 6 as higher risk loans. This is not directly comparable to our threshold choice of an LTI greater than 4 because it relates only to the size of the loan, not all debt a borrower holds. Using a threshold of 6 as a definition of high-LTI loans captures around 2 per cent of loans outstanding. These borrowers tend to have seen even larger increases in their scheduled minimum payments and are much more likely to not have enough cash flow (around 70 per cent). While this group is therefore much more likely to be in financial stress, focusing on this group risks missing a larger group of borrowers that are also at risk of entering financial stress as interest rates increase. High-LVR loans are defined as LVR greater than 80 per cent, which accounts for around 3 per cent of variable-rate owner-occupier loans. [8]

See ‘Box: Assumptions underlying estimates of borrowers’ essential expenses and income’ in Chapter 2: Resilience of Australian Households and Businesses. [9]

Previous work has found that borrowers with higher debt-to-income ratios (which captures a borrower’s total debt, including loans on other properties such as investment properties) tend to have larger savings buffers. This is mostly driven by investors who are more likely to have larger debts and larger liquidity buffers than owner-occupier borrowers considered here. Consistent with evidence presented here, previous work also found that high-LVR borrowers continue to have noticeably lower liquidity buffers many years after they take out their mortgages (RBA, n 7). [10]

See RBA, n 7. [11]