The ASX 200 banks may be in danger as half of mortgage-stressed households have “borrowed to the hilt”

The ASX 200 banks could be in danger as heavily indebted households face mortgage stress.

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The S&P/ASX 200 Index (ASX: XJO) banks could be in trouble as large numbers of households that have borrowed high levels of debt now face mortgage stress.

There is rising attention being put on the level of financial trouble that Australian households are facing.

This may worry the management of ASX 200 banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

How much mortgage stress is happening?

Digital Finance Analytics has analysed the situation and apparently over half of the households that are in mortgage stress have a very high level of mortgage debt. That’s according to reporting by the Australian Financial Review.

There are 788,211 households, or 51% of the mortgage-stressed total, that have taken on debt that is over five times their income. This number is 8.1% of the overall borrowing of households in Australia. As readers may have been able to guess, it’s NSW and Victoria that have the most postcodes that are seeing financial distress.

Mortgage stress is when a household’s expenses are more than the income.

In an ominous warning, the AFR quoted the director of Digital Finance Analytics, Martin North, who said:

The average new loans in Sydney are often eight times income, which is way too high, especially as we do not expect to see income growth in real terms anytime soon. If rates were to rise, it would crush these households and the markets.

Mr North also pointed out that the recently mooted lending restrictions wouldn’t assist the households that are already feeling the pinch. For the currently-troubled borrowers, it is only further interest rate cuts and incomes rising that would help.

Concern from banking management

The ASX 200 banks have already been worried about what’s going on in the lending market.

The CBA CEO Matt Comyn has previously given some comments to the House of Representatives Standing Committee on Economics about the housing market:

As the RBA has observed, activity in the housing market remains very strong, even after extended lockdowns in the two largest markets. We continue to monitor these developments closely, and have made adjustments to our lending settings. We are also thinking carefully about the impact of these dynamics on particular cohorts of home loan borrowers, including first home buyers.

There are plenty of ways that banks monitor the market and their loan book, including the level of home loans that are more than 90 days past due, though the mortgage holidays may have somewhat clouded this statistic since the onset of COVID-19.

With regards to CBA’s own loan portfolio it said in its FY21 result that arrears were steady to June 2021 at 0.68%, whilst the percentage of loans that were over 30 days overdue was 1.12%.

Other ASX 200 banks may also be keeping a close look at the ongoing mortgage stress situation including Suncorp Group Ltd (ASX: SUN), Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Macquarie Group Ltd (ASX: MQG).

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bendigo and Adelaide Bank Limited and Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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