Australian households financially resilient amid interest rates, petrol pain: Reserve Bank

Most Australian households have built up their mortgage buffers to ride out the impacts of higher interest rates and escalating tensions in the Middle East that have already pushed up petrol prices, according to the Reserve Bank.

While the central bank, in its financial stability review released on Thursday, warned Australia’s financial system was entering a more challenging period, it was “well-placed to handle an increasingly uncertain global environment”.

The commentary comes just two days after the RBA hiked official interest rates from 3.85 per cent to 4.1 per cent in a bid to stamp out resurgent inflation as oil prices surge.

“The vast majority of borrowers continue to have sufficient income to cover their scheduled mortgage repayments and essential expenses,” the RBA said, with households, on average, up to 15 months ahead on their mortgage repayments.

“The 50 basis point increase in the cash rate since the start of the year and increases in oil and gas prices over recent weeks stemming from the escalation of conflict in the Middle East are not estimated to have changed this picture materially.”

The central bank said the improved cash flows were due to falling inflation and interest rates towards the end of last year, as well as the stage three tax cuts.

This has led to a steady increase in disposable income per capita — income after tax and interest payments and adjusted for inflation — since mid-2024.

According to the RBA, a little over one per cent of variable-rate owner-occupier borrowers were estimated to be experiencing a cash flow shortfall at the end of 2025.

As lower inflation and interest rates have boosted real disposable incomes, the number of borrowers with a cash flow shortfall has declined notably since mid-2024, it said.

“The share of borrowers at greatest risk of falling behind on their loan — those experiencing a cash flow shortfall that also have low prepayment buffers — is around 0.3 per cent,” the RBA said.

However, the RBA also warned there was “early evidence” that some forms of riskier lending have picked up.

“High loan-to-valuation ratio lending to first-home buyers” had increased alongside the expansion of the Federal Government’s 5 per cent deposit scheme, the RBA said. The central bank added its liaison program showed participation in the scheme had been strong.

Treasurer Jim Chalmers on Wednesday warned inflation could spike above 5 per cent if the Middle East war drags on.

ANZ, like the other big four banks, is also warning of a follow-up rate increase in May, that would take the RBA cash rate back to 4.35 per cent for the first time since February last year, before the first of three cuts.