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Around 2 per cent of variable-rate owner-occupier borrowers do not earn enough to cover both their mortgage repayments and essential spending, and the RBA's October Financial Stability Review explains why that small group deserves attention.

Every month, a small slice of Australian home owners finds that the money coming in does not cover the money that must go out. The Reserve Bank of Australia (RBA) has a name for this situation – a cash-flow shortfall – and its October 2026 Financial Stability Review (FSR), released on 1 October, put a number on it.

According to the Review, the share of variable-rate owner-occupier borrowers in this position "increased a little over the first half of 2026, but remains relatively low at around 2 per cent". The RBA projects the share to stay a little under 2 per cent for some time, and it estimates that most borrowers in shortfall have at least six months of savings.

That is a reassuring headline for the system as a whole. For the households inside the 2 per cent, it describes a budget that is already under strain.

Defining a cash-flow shortfall

The RBA's definition is precise. A borrower is counted as being in shortfall when their income is not sufficient to cover scheduled mortgage repayments and essential expenses. In other words, it is a test of whether day-to-day earnings can carry both the loan and the basics of living, before any savings are touched.

Three features of the measure are worth keeping in mind:

  • It covers variable-rate owner-occupier borrowers. By definition it does not, on its own, describe property investors or borrowers on fixed rates.
  • It is a flow measure. It looks at income against outgoings, not at how much a household has saved or how much equity it holds in its home.
  • It counts scheduled repayments. A borrower can be in shortfall and still be keeping up with the loan, if savings are filling the gap.

That last point explains why a cash-flow shortfall is not the same thing as falling behind on a mortgage. The FSR found that the share of loans 90 or more days in arrears increased a little over the year to date but remains around pre-pandemic levels. Many households in shortfall are, for now, bridging the gap from their own reserves.

Small share, real pressure

Why does the RBA track a group this small? Partly because shortfalls are an early signal. A household that is drawing down savings each month is using up its cushion, and the longer that continues, the less room it has if conditions worsen.

Governor Michele Bullock acknowledged that pressure when she told the House of Representatives Standing Committee on Economics on 18 September that "only a small share are facing severe difficulty with their loan repayments." Small does not mean zero, and the RBA's language reflects that.

Both sides of the shortfall equation have been moving. On the outgoings side, the RBA's Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent on 29 September, its fourth increase this year. Assistant Governor (Economic) Sarah Hunter explained on 22 September that when the RBA raises rates, a borrower's minimum repayment goes up.

Essential expenses have been rising too. The August monthly CPI indicator showed headline inflation of 4.0 per cent, while underlying, or trimmed mean, inflation has been about 3.5 per cent for the past six months, according to Governor Bullock. The Board's September statement noted that "Higher fuel prices have partially been passed through to prices of other goods and services."

Savings: the buffer between shortfall and arrears

The most important qualification in the FSR's finding is the RBA's estimate that most borrowers in shortfall have at least six months of savings. That gives them time to adjust spending, change their circumstances or work through options with their lender before missing payments.

Across all borrowers, buffers are deeper still. The Review found that offset and redraw balances leave "the median borrower able to cover over a year of scheduled mortgage payments at current interest rates from these buffers", and judged this position stronger than before the pandemic. Hunter noted that most borrowers have offset or redraw accounts and can choose to put more in.

There is a timing issue, though. Bullock said at her 29 September media conference that "it can take 12, perhaps even 18 months" for the full effect of rate changes to be felt. The first-half 2026 shortfall figures predate the September increase, and by the Governor's timeline the effects of this year's earlier rises are also still flowing through.

What could push the number higher

Income is the other half of the equation, and the labour market is where risk could build. Bullock said on 29 September that unemployment "has risen from 3.5 per cent over the past couple of years to 4.6 per cent", while adding that "we still think the labour market is a little bit tight." Hunter's observation that individuals can struggle if their income changes is the key point: a lost job can push a household into shortfall far faster than a rate rise.

The RBA's severe stress scenario shows how a broad shock would play out. If the "unemployment rate increases to 6.3 per cent, inflation increases to 7 per cent, and the cash rate rises to 5.6 per cent", the share of mortgagors at higher risk of default is estimated to rise to around 5 per cent. That is a different measure from the cash-flow shortfall share, but it gives a sense of scale – and the RBA estimates about two-thirds of that group would still have buffers to service their debts for at least six months.

The bottom line

The 2 per cent figure captures borrowers whose income no longer covers their mortgage and essentials. It edged up in the first half of 2026 but remains, in the RBA's words, "relatively low", and is projected to stay a little under 2 per cent for some time. Savings are doing the heavy lifting, with most of those borrowers estimated to have at least six months of buffers.

What to watch: the next CPI update on 28 October, the Board's next decision at 2.30 pm AEDT on 3 November, and any movement in unemployment. Questions borrowers may wish to consider include how their own income, repayments and savings compare with the measures the RBA uses.