Introduction  

After a challenging period marked by rising interest rates and inflation, Australian households are starting to feel some financial relief. The Reserve Bank of Australia’s (RBA) latest Financial Stability Review reveals that mortgage stress has dropped to its lowest levels since 2022.

Supported by easing inflation, interest rate cuts, and government tax reforms, household spending is recovering while savings buffers remain strong.

This positive trend signals renewed confidence in the economy, offering hope for sustained growth and financial stability in 2025 and beyond.

Australian couple reviewing their household budget at home with a laptop, calculator, and piggy bank on the table, reflecting improved financial stability, reduced mortgage stress, and strong savings in 2025.

Mortgage Stress Hits a New Low

One of the standout findings from the RBA’s report is the sharp decline in mortgage arrears. As of the latest quarter, only about 0.7% of mortgage holders are behind on repayments by more than 90 days figure that reflects pre-pandemic levels.

This decline in mortgage stress indicates that fewer Australians are struggling to meet their home loan repayments despite the prior period of interest rate hikes. It’s an encouraging sign that financial pressures on households are easing.

Strong Savings Buffers Provide a Cushion

Australian homeowners have been proactively creating financial buffers through offset accounts and redraw facilities. While these buffers peaked during pandemic lockdowns – thanks to government stimulus payments, they remain significantly higher than historical averages and are robust by international standards.  

  • The bottom 25% of income earners with a mortgage have enough savings to cover 10 months of repayments.
  • The top 25% can cover 20 months of repayments with their savings.

This financial resilience acts as a safety net, helping households manage unexpected expenses or economic shocks.

Rising Property Prices Fuel the Wealth Effect  

Since the RBA began its interest rate tightening cycle in May 2022, property prices in Australia have increased by approximately 10%. This rise in home values has pushed the share of borrowers in negative equity below 1% – meaning most homeowners have positive equity in their properties.

Higher home values often lead to a “wealth effect,” where consumers feel financially better off and are more inclined to spend. This psychological boost supports broader economic activity and underpins the recent uptick in household spending.

Household Spending Shows Consistent Growth 

Household consumption has risen steadily, increasing for four consecutive months as of August 2025. According to the Australian Bureau of Statistics:

  • Spending on health services increased by 8% year-on-year.
  • Expenditure on hotels, cafés, and restaurants grew by 6.6%.
  • Overall household spending rose by approximately 5% compared to the previous year.

EY economist Cherelle Murphy notes that these trends indicate consumers are willing to lift their spending moderately compared to earlier in the year, suggesting a gradual but steady recovery in demand.

Risks and Challenges Remain  

  • Trade and tariff uncertainty: The impact of global trade tensions and tariffs has yet to materialize fully and could pose risks to household spending and business investment.
  • Non-bank lending sector: While the sector remains relatively small and contained, rapid growth in 2024 has led to increased scrutiny. ASIC recently intervened to halt investments into certain private credit funds, reflecting regulatory vigilance.
  • Business challenges: Company insolvencies, especially in the hospitality, retail, and construction sectors, remain elevated and reflect ongoing cash flow pressures. These challenges are expected to ease as borrowing costs fall.

What This Means for Australians

  • Economic Confidence is Improving: Reduced financial stress and growing household spending contribute to stronger consumer confidence, which in turn supports business growth and investment.
  • Potential for Further Rate Cuts: With less pressure on household finances, the RBA has more flexibility to ease interest rates, further stimulating spending and economic recovery.
  • Support for Consumer-Focused Industries: Sectors like hospitality, retail, and healthcare stand to benefit from rising consumer expenditure.
  • Watch Inflation and Global Risks: While easing household financial pressures are promising, inflation and international trade tensions remain important factors to monitor.

Conclusion

The RBA’s latest financial stability review delivers welcome news for Australian households. Mortgage stress has eased to pre-pandemic levels, savings buffers remain healthy, and spending is on the rise. These factors together paint a picture of gradual recovery and resilience amid lingering uncertainties.

As interest rates potentially fall and consumer confidence strengthens, the outlook for household spending  – a key engine of the Australian economy  – looks brighter in 2025.