Aussies facing soaring fuel prices and interest rates, but little chance of ‘system stress’ according to central bank
Households are better placed than feared to absorb higher mortgage repayments, according to the Reserve Bank of Australia (RBA)’s latest Financial Stability Review.
Despite recent – and ongoing – mortgage price increases, the central bank says the financial position of most Australian households is strong and that budget pressures have eased since mid‑2024.
Scheduled mortgage payments fell through 2025 as earlier cash rate cuts flowed through, though they remained higher as a share of income than before COVID.
Even so, most mortgagors are still making extra payments into offset and redraw accounts, further building savings buffers.
The share of borrowers in “severe financial stress” – where mortgage payments plus essentials exceed income – has fallen since mid‑2024 and remains small, with loan arrears back around pre‑pandemic levels.
The RBA estimates that a little over 1% of variable‑rate owner‑occupier borrowers were in cash flow shortfall at the end of 2025, down notably from mid‑2024. Only around 0.3 per cent are both in shortfall and have low prepayment buffers – the group at greatest risk of falling behind.
While the RBA’s latest rate hikes in February and March, along with rising energy costs linked to the conflict in the Middle East, are expected to tighten cash flows, the RBA does not reckon this will lead to widespread system stress.
“While this environment will be challenging for some households and businesses, the strong financial position of most borrowers is likely to limit the risk of widespread financial stress in response to higher inflation and interest rates, or if a significant economic downturn were to occur,” said the RBA.
But this calculated sentiment is not shared by everyone.
Household budgets tighten
As the major banks enact another round of mortgage rate hikes following Tuesday’s 25-basis-point cash rate increase, Australians will see their borrowing capacity reduced within a fortnight.
Canstar analysis shows that a borrower on the average full-time wage of $106,950 could see borrowing capacity reduced by about $12,000 as lenders continue to announce increases to variable and fixed mortgage rates in response to the move. If the cash rate rises again in May, Canstar estimates the same borrower’s borrowing capacity could be lower by about $37,000 in total.
“Right now, home buyers are facing the second highest cash rate setting this country has seen in the last 14 years, at the same time property prices in key areas continue to march north, albeit at a slower pace. This makes what was already a tricky equation a near-impossible puzzle to solve for many prospective home owners,” said Canstar data insights director Sally Tindall.
All the while, Australians are getting pummeled at the petrol station by sky-high oil prices as a result of the joint US-Israel war on Iran.
First-home buyer warning
Despite the RBA giving households the all clear, mortgage brokers like Joseph Daoud worry that first-home buyers are taking on too much debt to weather higher repayments.
Daoud believes Labour’s expanded 5% Deposit Scheme is luring first‑home buyers into unaffordable debt, describing the scheme as “a dream that is non‑existent”.
“People are going into these very, very blindly,” he told MPA, pointing to rising interest rates and petrol prices. “My biggest concern is what happens when the individual can no longer afford the property… People who have never had a mortgage before… are only going to be in for a very rude shock.”
Peter White, the outgoing chief executive of the Finance Brokers Association of Australia (FBAA), also worries that many mortgage holders, particularly first-home buyers, will struggle to meet increased payments.
He (unsuccessfully) urged the RBA not to hike rates again this week, warning that cost-of-living increases resulting from the ongoing Middle East conflict are about to ramp up.
“We expect that not only will fuel costs increase but this will flow through to other supply chain increases and potentially add hundreds of dollars every month to the average household budget,” said White.
Anja Pannek, chief executive of the Mortgage and Finance Association of Australia (MFAA), said that higher borrowing costs “are now becoming a feature of the economic environment”.
Pannek said borrowers have already become more cautious in a new cycle of higher interest rates and cost-of-living pressures, as evidenced by softening borrower confidence in the MFAA February 2026 Market Sentiment Survey.
All four major banks – Commonwealth bank, NAB, Westpac and ANZ – expect the RBA to raise rates again in May, bringing the central bank rate up to 4.35%.
Maybe systemic pressures won’t emerge, but this is unlikely to assuage hard-pressed households.
The RBA, for its part, stressed that resilience is not uniform. Lower‑income households and renters face more intense pressure, and high household indebtedness means standards must remain tight.
