Paul Sainsbury
Average Australian household debt is four times what it was in 1988, rising from $60,000 to $245,000 after inflation, according to the latest AMP.NATSEM Income and Wealth report –Buy now, pay later: Household debt in Australia.
The ratio of household debt to disposable income has almost tripled, from 64 per cent to 185 per cent during the same time.
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.
But if interest rates were to rise by 2.5 percentage points, interest payments for Australia’s most indebted households with mortgages[1] would rise to at least 58 per cent of household income, up from the current 42 per cent. These households would need to find an extra $16,615 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 per cent to 23 per cent of income, taking annual interest payments from $15,464 to $21,687, or an extra $6,223 per year.
Other findings from the report include:
- Typical households headed by 30 to 50 year olds have been hit the hardest with their debt to income increasing from 149 per cent to 209 per cent during the past 10 years.
- For people aged over 65, mortgages make up almost a third of their household debt – up significantly from 20 per cent 10 years ago.
- For low-income households, debt is 43 per cent of their disposable income, almost doubling since 2004.
- The top 10 per cent most leveraged Australian households now have an average debt to disposable income ratio of 600 per cent.
AMP Chief Customer Officer Paul Sainsbury said the findings emphasise the need for Australians to more actively engage with their everyday finances.
“With debt becoming a bigger part of our lives, we must recognise the stark difference between good and bad debt. Good debt builds wealth, bad debt diminishes it.
“Bad debt is like compound interest in reverse – small financial decisions now can greatly influence long-term debt balances and the amount of interest we pay.
“This can have a profound impact on our wealth in later life and ability to enjoy the retirements we aspire to.
“We need to better manage our finances, including our everyday cashflow, as part of a clear long-term plan to pay down debt.
“When thinking about household finances it’s essential to factor in the impact if interest rates start creeping back up from their current historic lows and contingency plan in the event we lose our job or if an unforseen health event prevents us from working.
“With mortgages making up 30 per cent of debt for households headed by a person aged 65 or older, it’s also clear we need to ensure Australians are incentivised to save for retirement,” Mr Sainsbury said.
NATSEM Principal Research Fellow, and author of the report, Ben Phillips commented on the burgeoning appetite of Australia’s most leveraged households for even more debt during the past 10 years.
“Debt levels for households with the top 10 per cent of debt are six times higher than their annual income, a 160 percentage point increase since 2004,” Mr Phillips said.
Since 2002, AMP and the National Centre for Social and Economic Modelling have produced a series of reports that open windows on Australian society, the way we live and work and our financial and personal aspirations.
AMP publishes these reports to help the community make informed financial and lifestyle decisions and to contribute to important social and economic policy debate.Curved flare_gradient_rgb.jpg