How to tackle money pressures as financial hardship ‘likely’ in 2023, per new report

Close up of a mid adult woman using a banking app on her phone

An economic climate fraught with inflation has pushed up interest rates and the cost of living, making it a challenge for borrowers to meet their repayment obligations across a range of credit products, including home loans.

Experian’s annual Risk Radar Report reveals 100% of leading risk experts believe it’s ‘likely or very likely’ consumers will face an increase in financial hardship and defaults on loans over the next 12 months. 

In fact, the cracks are already starting to show, according to some lenders. 

Experian’s report found that almost two-thirds (62%) of Australian businesses said the volume of customers defaulting and entering debt collection had increased over the past year alone.

Yet Australians are continuing to borrow even more than before.

A man uses his mobile credit card to buy apples

Australians turn to credit to ease cost of living pressures

The research found one in three (31%) consumers are borrowing more money than they used to and that the popularity of short-term credit products (like pay-advance loans) increased by over 50% in the first six months of 2022.

The uptake of credit products indicates Australians could already be struggling with the cost of living increase – unsurprising, given the 35% of Australians admitting they live paycheck-to-paycheck.

The uncertainty is only compounded for those feeling the brunt of home loan interest rate rises, or those watching the interest rate-storm brewing from the relative comfort of their soon-to-end fixed rate home loans.

Related: Fixed rate home loan about to end? What to do now that interest rates have gone up

An illustration of a house balanced on a see-saw against a piggy bank, representing money

Debt vs disposable income reveals weak-point in Australian wallets

The MasterCard Economics Institute (MCEI) looked at home loan debt as a percentage of disposable income. It found the average Australian household has mortgage debt equal to 177% of their disposable income, on par with the Netherlands.

As this number is over 100% of disposable income, it means that repayments are eating into the money they would otherwise use for everyday essentials, such as groceries and fuel – both of which are already more expensive compared with the start of the year.

The average grocery bill has increased by 34% to $105, and the average spend on fuel has increased 27% to $121 since the beginning of 2022, according to Experian.

The effect of costlier essentials is reflected in the decline of the household savings ratio, which has been consistently lowering since September 2021.

According to the Australian Bureau of Statistics (ABS), the household savings ratio declined from 8.3% in August 2022 to 6.9% in September 2022. What this tells us is that household spending is outpacing the growth of disposable income.

These factors combine to put households at a greater risk of overextending their finances, leaving little room for a financial safety net to combat further interest rate hikes, or for taking advantage of the rising savings account rates.

Australians expected to wind back discretionary spending

According to the MCEI’s Economic Outlook 2023, three-fifths of Australians with a home loan are on variable rates.

As interest rates continue to rise in line with inflation, it is expected that discretionary (that is, non-essential) spending will decline as consumers attempt to reign in their finances to meet their repayments.

A young couple organise their finances with the aid of a laptop in their living room

What can Australians do to prepare their finances for 2023?

With expectations mounting that 2023 will be a financially difficult year for many, ensuring you’re prepared could be a really important step to ease the burden on your bank account in 2023.

If you currently have a loan or other line of credit, like a credit card, and are worried about how high interest rates will go in the future, then it could be time to look into the areas where you could potentially save.

Refinance your home loan

A large part of the debt most people will accrue from their home loan comes in the form of interest repayments.

By finding a refinance home loan with a lower rate than the one you’re currently paying, you could save yourself a significant amount of money over the life of the loan. Compare home loans with Mozo to see if you could switch and save.

Switch to a home loan with an offset account

Another way to reduce the overall amount of interest you pay on your home loan is to look into home loan offset accounts.

Offset accounts can save you money by deducting the amount of cash you deposit into the account from the cost of your home, hence reducing the amount which your interest rate is calculated against.

Read up on how offset accounts can save you money, to decide if it’s the right move for you.

Pay off your credit card debts

Paying off your credit card debts can free-up a significant amount of money, otherwise swallowed up by late fees and interest repayments.

While it can be a difficult task to complete, there are plenty of steps you can take to clear your credit card debt.

There is also the option to research the options available on balance transfer cards. Sometimes, credit card providers even offer attractive balance transfer offers for you to take advantage of.

Refinance your car or personal loans

In a similar fashion to refinancing your home loan, you may also be able to switch to a lower car loan or personal loan interest rate.

Just make sure you read up about what you need to know before refinancing a car loan, or refinancing a personal loan.