RBA Calls for Prudent Lending as Borrower Financial Health Improves

According to the RBA's latest review of Australia's financial stability, the share of mortgage holders spending more than they earn has fallen to its lowest level since 2022. Specifically, one in 20 owner-occupiers on variable-rate mortgages spent more than they earned in mid-2024, but that figure has now improved to about one in 30. This positive trend suggests that households are better managing their finances, potentially due to factors such as tax cuts and easing inflation.

Despite these encouraging signs, the RBA urges banks to maintain prudent lending criteria. The central bank warns that further cuts to interest rates could lead to over-inflated house prices amid a surge in borrowing if interest rates continue to fall. It emphasises that while the banking sector is well-placed to manage losses and continue lending in the event of a severe economic downturn, it is crucial to avoid complacency.

Victorian mortgage holders are among those under the most financial stress, which the RBA attributes to their larger loans and smaller savings buffers. This regional disparity underscores the importance of tailored lending practices that consider the specific circumstances of borrowers.

For borrowers, this environment presents both opportunities and challenges. While improved financial health may enhance access to credit, the RBA's cautionary stance suggests that lending standards will remain stringent. Prospective borrowers should ensure they have a clear understanding of their financial position and the terms of any loan agreements.

In conclusion, the RBA's advisory serves as a reminder that, despite improvements in borrower financial health, maintaining rigorous lending standards is essential to safeguard the stability of Australia's financial system. Both lenders and borrowers must navigate this landscape with diligence and foresight.