Average Australian household debt is four times what it was in 1988, rising from $60,000 to $245,000 after inflation. The ratio of household debt to disposable income has almost tripled, from 64% to 185% during the same time.
During the past decade our appetite for debt has skyrocketed, according to the latest AMP and National Centre for Social and Economic Modelling (NATSEM) Income and Wealth report – Buy now, pay later: Household debt in Australia.
Declining interest rates, low unemployment and a strong economy have driven Australians to take on more debt and at the same time cushioned the impact of repayments. However, these conditions can be a double-edged sword because interest rates will rise at some point. If they were to go up by 2.5 percentage points, AMP: NATSEM predicts interest repayments for Australia’s most indebted households with mortgages – those with the top 10% of debt – would rise to at least 58% of household income, up from the current 42%. In dollar terms, these households would need to find an extra $16,616 a year just to cover interest payments, which would increase from $43,926 to $60,541 a year.
For households with mortgages and typical levels of debt, a 2.5 percentage point increase would mean debt repayments would rise from 16% to 23% of income, taking annual interest payments from $15,464 to $21,687, or an extra $6,223 per year.
These are mind-boggling figures and should prompt us to scrutinise our own everyday finances, paying particular attention to our debt levels. Ask yourself if you can better manage your finances, including everyday cashflow, as part of a clear, long-term plan to pay down debt. How will you cope if interest rates start creeping back from their current historic lows? What is the contingency plan in the event of job loss or unforseen health event that prevents work?
With Australians – from first home buyers right through to retirees – now in record amounts of debt, managing the debt issue requires prudence in order to impact positively on wealth later in life and provide the sort of retirement as aspire to.
DEBT FACTS AT A GLANCE
- Typical households headed by 30 to 50 year olds have been hit the hardest with their debt to income increasing from 149% to 209% during the past 10 years.
- For people aged over 65, mortgages make up almost a third of their household debt – up significantly from 20% 10 years ago.
- For low-income households, debt is 43% of their disposable income, almost doubling since 2004.
- The top 10% most leveraged households have six times as much debt as their annual disposable income.
Household debt in Australia has increased considerably
- In 1988, the average household could have paid off all its debt with the after-tax income it earned in eight months – it would now take almost two years.
- Australian household debt has grown at 5.3% above inflation each year, outstripping income growth of 1.3%.
Australians taking more debt into retirement
- Of the top 10% most-indebted households, it’s the over 65 year old households that have increased their level of debt the most – their repayments to income have almost doubled from 9 to 17%.
First home buyers saying yes to considerably more debt
- Rising house prices have seen first home buyers doing it tough with their debt levels at 3.6 times their annual disposable income, up from 3.1 since 2004.
- Typical first home buyers would feel the greatest impact from rising interest rates – a 2.5 percentage point rise in rates would increase interest repayments as a percentage of disposable income from 21.2% to 30.2% or an extra $8,047 a year.
Lower income families have also taken on a lot more debt
- Among the top 10% of indebted households, low-income households are in the most vulnerable position with their interest payments increasing from 40.8% to 59.9% of disposable income during the past 10 years.
Debt picture precarious for the most leveraged households
- Australia’s debt boom has impacted all households, but it is the most indebted who have ramped up their leverage the most – for households with the top 10% of debt levels, debt to income has increased from 4.4 to six times income, compared to the typical household which increased from 0.7 to 0.88 times income.
Mortgage debt is highest for households headed by a 30-50 year old and over 65s have the most investor debt
- Home mortgages make up almost 63% of debt for households headed by a person aged 30 to 50.
- Investor debt is highest for over 65 year old households at almost 60% of their total debt.
90% of Australian household debt is being used to buy a home or to build wealth through investing
- 56% on mortgage and 36 % on investing (e.g. rental properties or shares).
Many Australian households experience financial stress
- A quarter of Australians currently experience financial stress from things like paying bills, raising emergency money or having to ask friends for financial assistance.
- Low income families experience six times the rate of financial stress than higher income families.
Source: AMP: NATSEM Income and Wealth report – Buy now, pay later: Household debt in Australia.