Australians who took out loans to renovate their kitchen or go on holiday are most at risk of financial stress, new data shows.
The most aggressive rate hikes in a generation are causing severe financial hardship, with younger people and those who took out a new home loan after 2019 especially at risk for mortgage stress.
But when it comes to late payments, those who took out a personal loan to finance expenses such as a kitchen renovation, a vacation or a boat were most at risk, consumer credit checking firm Experian revealed in a new report.
One in 15, or 6.7 percent, of borrowers with a personal loan had defaulted on a loan during the 2023-24 fiscal year, and these unsecured products often came with double-digit interest rates.
Auto loans were the next riskiest category, with one in 17, or 6.1 percent, falling behind.
Jordan Harris, Experian’s chief innovation officer, said borrowers struggling to repay a personal loan often had multiple such debts and very low levels of savings compared to other types of borrowers.
“The type of borrower who would apply for a personal loan might not have access to other forms of savings,” he told Daily Mail Australia.
‘When people have three or more personal loans, that’s a real risk factor – these are people applying for loans from multiple different providers simultaneously.
Australians who borrow money to renovate their kitchen are most at risk of financial stress, new data shows
Jordan Harris, Experian’s chief innovation officer, said borrowers struggling to repay a personal loan often had multiple such debts and very low levels of savings compared to other types of borrowers.
‘When you have multiple personal loans, yes, that means a lot of payments.’
Car loan applicants are also at risk, as they often prioritize paying off their home mortgage first, then fall behind on their vehicle loan payments.
“People who have a car loan are still seeing their everyday costs go up,” he said.
‘Many people who have a car loan may also have a mortgage, so they may also feel some stress with mortgage payments.’
By comparison, just 1.3 per cent (or one in 75) of home borrowers were in arrears on their mortgage, despite the Reserve Bank’s 13 interest rate hikes in 2022 and 2023.
Credit rating agency Moody’s Ratings estimated the proportion of Australian borrowers who were 30 days or more late on their payments at 1.73 percent in the June quarter.
“Australian mortgage default rates, which rose during the June quarter, are set to continue to rise moderately for the remainder of this year as high interest rates and persistent inflation put financial stress on households,” it said.
Experian said those most at risk had applied for a loan since 2019, shortly before the RBA’s cash rate was cut to a record low of 0.1 per cent during Covid.
“Mortgage default rates have increased significantly for borrowers who have applied for a mortgage over the past five years,” he said.
‘The share of mortgage accounts opened after 2019 with one or more late payments has increased to six times that of those who applied for a home loan before 2007, and five times that of home loans opened between 2008 and 2015.’
Home loans approved in 2023, during the RBA’s rate hike cycle, were considered particularly risky.
“Looking deeper into the most recent performance of new mortgage loans, default rates are progressively worsening,” he said.
Those who took out a personal loan to finance expenses such as a kitchen renovation or a vacation were most at risk, consumer credit monitoring firm Experian revealed in a new report (pictured is Honolulu, Hawaii).
‘After six months, almost twice as many mortgage loans taken out in 2023 had missed one or more payments compared to mortgage loans taken out in 2021.’
Younger borrowers and those who had signed a new loan most recently were most at risk.
“While late payments and defaults have plateaued over the past six months, the data shows that several segments, including younger borrowers, those who opened accounts in the past five years and those with multiple accounts, are showing higher rates of financial stress,” the report said.
‘Credit stress and default rates worsen with each new generation of borrowers.’
Experian’s Risk Radar Report, based on a survey of risk managers at Australia’s major banks, showed concern about rising unemployment in the wake of aggressive rate hikes.
Rising house prices have also meant borrowers are taking on more debt, and two-thirds of risk managers are concerned about this.
High inflation is also depleting savings and causing some borrowers to struggle to pay their repayments.
Seven in ten risk managers also expected financial stress to worsen over the next year.