Financial hardship may still be below pre-pandemic levels but the head of the Australian Banking Association warns borrowers could suddenly reach a breaking point.
ABA chief executive officer Anna Bligh said rates of financial hardship, repossessions and defaults were still low compared to historical averages but banks had started recording a "slight uptick" in the 90-day default rate.
She said there were also signs of stress across unsecured lending, such as credit cards and personal loans, with Australian borrowers typically prioritising their mortgage repayments over other types of debt.
The last Australian Prudential Regulation Authority data on the 90-day default rate, which indicates three missed payments, actually fell slightly for both individuals and businesses in the December quarter.
But based on what banks were telling her, she said they were expecting this rate to lift modestly in the first three months of 2023.
Ms Bligh likened the build-up of financial stress to a rubber band.
"Everybody can stretch, you know, they can stretch for the next payment they can stretch for the next interest rate rise," she said.
"And then something happens to the car, you know, and the elastic band breaks."
She said banks were "very aware" that they might start seeing this at a "slightly bigger scale".
Finance Brokers Association of Australia managing director Peter White said borrowers were in a much more precarious position compared to 18 months ago, just before interest rates started rising.
He shared new McCrindle research commissioned by the brokers association that found 94 per cent of borrowers said rising interest rates had put pressure on their financial position.
Sixty per cent had cut back on weekly spending, 46 per cent had or were considering withdrawing savings or money in offset accounts and 69 per cent had or were considering cancelling their holiday plans, the survey revealed.
"I dare say the rubber band is getting close to being stretched as far as it can," Mr White said.
But Ms Bligh said Australian banks were ready to help customers facing hardship and said repossessing properties was "an absolute last resort measure".
"If they don't get a repayment of a loan, that's a bad commercial outcome for them," she said.
She said keeping customers in their principal place of residence was the starting point for any hardship case.
"They'll probably, to be honest, think a little bit differently about people who've got five or six investment properties - you know, that's a different set of financial circumstances."
She said there were many ways banks would help people in trouble, such as deferring payments until unemployed people found work again or reducing the size of their repayments for a period.
Ms Bligh did not comment directly on the Australian Competition and Consumer Commission's investigation of bank interest rate settings but said deposit rates were as high as they had been for a decade.
"In the December quarter of 2022, authorised deposit institutions paid $18.8 billion in interest to deposit holders - more than they have paid in any single quarter since March 2012."
The consumer watchdog launched an investigation into deposit products earlier this year following concerns banks weren't passing cash rate hikes on evenly to savings customers.
The regulator released an issues paper on the subject on Friday calling for public comment.
ACCC chair Gina Cass-Gottlieb said banks tended to pass on interest rate hikes to variable home loan customers in full but increases to savings interest rates had often been smaller or conditional.
