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In the RBA's harshest mortgage scenario, the share of borrowers at higher risk of default climbs to around 5 per cent – a level the October Financial Stability Review says is only a little above the 2023 peak.

A stress test is only as useful as the benchmark it is measured against. In its October 2026 Financial Stability Review (FSR), released on 1 October, the Reserve Bank of Australia (RBA) chose a telling one: the recent past.

Under its severe downturn scenario, the RBA estimated that "the share of mortgagors at a higher risk of defaulting on their loans is estimated to increase to around 5 per cent". The Review then placed that number in context, noting it is only a little higher than the peak in 2023. In other words, a sharp, combined shock to jobs, prices and interest rates would push default risk to a level not far above one Australian borrowers have recently lived through.

That comparison is the core of this article. It explains why the RBA's resilience message rests less on the absence of risk and more on the ability of borrowers and lenders to absorb it.

Why compare with 2023?

Benchmarking a hypothetical result against a real, recent peak gives readers a practical yardstick. A figure of "around 5 per cent" means little on its own. Set beside a level of risk the system has already experienced, it becomes easier to judge whether the outcome would be a manageable strain or something more serious.

The scenario itself is demanding. It assumes 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". Governor Michele Bullock put unemployment at 4.6 per cent on 29 September, and the cash rate target is currently 4.60 per cent following that day's 25 basis point rise. The scenario therefore stresses borrowers well beyond today's conditions, yet the default-risk result lands only a little above 2023.

The RBA did not suggest this is the likely path. Asked about recession at her 29 September media conference, Bullock said: "That is not our central base case at this moment." The scenario is a test of resilience, not a forecast.

What keeps the number contained?

The answer, according to the Review, is buffers. About two-thirds of the borrowers who would be at higher risk in the scenario would still have buffers to service their debts for at least six months.

That detail changes how the 5 per cent figure should be read. Being at higher risk of default is not the same as defaulting. A borrower with six months of savings has time to find new work, adjust spending or work through options with their lender before a missed payment becomes a serious problem.

The broader buffer picture is strong. The FSR found 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. Assistant Governor (Economic) Sarah Hunter said on 22 September that just over 40 per cent of households with mortgages are two or more years ahead on their repayments. She also noted that when the RBA raises rates, a borrower's minimum repayment goes up, but most borrowers have offset or redraw accounts and can choose to put more in. Those accounts are the cushion the stress test leans on.

Where are borrowers starting from?

A stress test's outcome depends heavily on the starting point. The FSR's current readings are steady:

  • The share of variable-rate owner-occupier borrowers in cash-flow shortfall "increased a little over the first half of 2026, but remains relatively low at around 2 per cent", and most of those borrowers are estimated to have at least six months of savings.
  • There are "less than 1 per cent of borrowers estimated to owe more on their loan than the value of their property".
  • Arrears of 90 days or more increased a little over the year to date but remain around pre-pandemic levels.

Low negative equity is especially relevant to default risk. When almost all borrowers owe less than their home is worth, a household in trouble generally has more options than one whose loan exceeds the property's value.

Bullock summarised the position for federal MPs on 18 September: "The share of borrowers in negative equity remains very limited and only a small share are facing severe difficulty with their loan repayments."

What about the lenders?

Default risk among borrowers only becomes a systemic issue if it threatens the institutions that lend to them. Here, too, the Review was reassuring. It found that "Australian banks are well positioned to continue lending, even in a downturn", and that "system-wide risks to stability posed by non-bank lenders remain contained by their relatively small size".

That matters for the scenario's knock-on effects. If banks can keep lending through a downturn, credit continues to flow to households and businesses, which helps prevent a shock from feeding on itself.

The RBA's overall assessment was that "Australia's financial system has a good degree of resilience, but global and operational vulnerabilities continue to mount". The risks it highlighted most strongly were not domestic mortgages but "elevated threats from ongoing geopolitical tensions, growing vulnerabilities in global financial markets", along with "advances in artificial intelligence and critical service provider disruptions".

The bottom line

The RBA's severe scenario lifts the share of mortgagors at higher risk of default to around 5 per cent – only a little above the 2023 peak – and about two-thirds of that group would still have at least six months of buffers. Low negative equity, strong median savings and arrears around pre-pandemic levels give borrowers a solid starting point.

The scenario is not a forecast, and the RBA's central case does not include a recession. What to watch: the 28 October CPI release, the Board's next decision at 2.30 pm AEDT on 3 November, and the path of unemployment, which the RBA forecast in August to "increase to 4.8 per cent by the end of 2028".