Oct 2023 | Digital | Affordability, Digital
Gauging consumer affordability: An evolving challenge beyond income

In Australia’s ever-changing economic landscape, assessing financial capacity is more crucial than ever. Rising costs, income disparities, and evolving consumer behaviours require a holistic approach to affordability. By harnessing the power of data and technology, lenders can make well-informed affordability decisions and meet responsible lending obligations.

In the ever-changing landscape of today’s economy, measuring an individual’s financial capacity is a task that demands ongoing attention. While it’s often observed that those with lower incomes bear the brunt of financial strain during periods of rising prices and changing interest rates, there has been a notable shift in recent times. Individuals in higher income brackets are now grappling with adapting to their altered financial circumstances, as their disposable incomes become increasingly stretched due to the persistent cost-of-living pressures.

  • Since the first increase in interest rates in May 2022, most variable-rate borrowers (who account for around 75% of housing credit) have seen their mortgage payments increase between 30%-50% according to the RBA
  • Housing affordability continues to worsen with the average Australian making the median income having to pay nearly 50% of their earnings to maintain average loan repayments according to the Real Estate Institute of Australia’s Housing Affordability Report. Australian renters are also feeling the unaffordability squeeze, having to pay just over 23% of their income to meet median rent.
  • The ANZ Roy Morgan Financial Wellbeing Indicator in September 2023 revealed that the total financial wellbeing of Australians continues to decline, dropping 5.5% YOY between June 2022-June 2023.

These shifts take us into new territory where consumers are increasingly facing financial hardship primarily due to escalating essential expenses, as opposed to the income shocks witnessed during the pandemic, such as job layoffs and redundancies affecting people’s finances.

Consequently, it’s more evident that relying solely on income for lending decisions is no longer adequate in assessing an individual’s affordability.

Escalating household expenditure affordability

A recent WeMoney and Experian State of the Economy Report reveals some insights into how Australian consumers have been impacted by the cost-of-living crisis and higher interest rate environment.

  • 90% of Australians surveyed say they have been impacted by the rising cost-of-living
  • 1 in 2 say they are financial struggling
  • 60% say their regular weekly expenses are up by $100 or more
  • Nearly 60% say they are worried about the next 12 months

Our data also shows that since the start of the year, WeMoney members have witnessed significant changes in their average payments for the following:

  • Average utility payments are up by 79%
  • Expenditure at the petrol pump is up by 40%
  • Supermarket spending is up by 10%

Shifting consumer behaviours

The financial strain is leading to shifts in buying patterns and credit behaviour. According to the WeMoney and Experian State of the Economy Report:

  • 1 in 3 Australians say they are looking to earn additional income
  • 46% are actively looking to refinance their debt products over the next 12 months
  • 65% are prioritising savings in the next 12 months

Experian transaction insights revealed that WeMoney members have shifted discretionary spend patterns:

  • 20% decline in travel transactions for upcoming holidays
  • 15% decline in event ticket purchases
  • 5% reduction in subscription payments

Experian credit bureau data has also shown that Australian consumers are turning to short-term lending to cope with a 54% increase in new credit card enquiries in the past two years, a 42% rise for Buy Now Pay Later products and a 36% jump for personal loans.

This intricate tapestry of financial pressures and individual responses poses numerous challenges for organisations, from credit providers to utility companies. Assessing an individual’s financial health accurately at the outset of a relationship, such as when applying for a new service or credit, can be challenging enough. However, it becomes even more complex when an individual’s financial situation undergoes changes during the term or contract. It’s just as important to comprehend and monitor a consumer’s ability to afford a loan throughout the life of the agreement to minimise financial stress and maximise financial wellbeing.

Today’s affordability challenge

Estimating expenditure is not a ‘one size fits all’ endeavour. People have varying spending habits, priorities, and diverse household sizes and compositions. Moreover, when times get tough, individuals adapt differently.

Without a clear understanding of essential expenses, there is no way to gauge whether individuals have the capacity to take on credit or meet their existing financial obligations.

Many methods of calculating essential expenditure don’t tailor estimates to the individual or are based on small survey sizes. Basing affordability assessments on these broad averages can lead to misguided decisions. The need to consider and monitor individual-level income and expenditure throughout the agreement is important for organisations to meet responsible lending obligations.

However, the volatility in today’s incomes and expenditures, and higher consumer expectations can present quite the challenge.

  • More Australians want credit providers to proactively monitor financial health – two thirds are comfortable with them doing according to the WeMoney and Experian State of the Economy Report
  • 60% of lenders acknowledge a poor credit decision could put their customers in financial hardship as revealed in the Forrester study Drive Speed and Accuracy with Emerging Technology and Alternative Data
  • 53% of risk experts admit difficulty in reliably identifying financial stress until a late payment and no expert surveyed said their organisation was highly effective at proactively identifying when a customer is in financial stress according to the Experian Risk Radar Report

How we can help navigate complex affordability decisions

By harnessing data and technology, lenders can navigate complex affordability decisions with ease, and at scale.

  • Income – In an uncertain economy, assuming stable or increasing income for the life of a loan is risky. Wage growth still lags inflation, impacting real incomes. To make informed lending decisions, organisations need to assess income source and stability. Experian Affordability solutions offer streamlined income assessment, providing an updated view of earnings, and unlocks income trends so you can easily recognise changes in income and affordability.
  • Non-discretionary expenditure and indebtedness – Rising living costs limit discretionary spending. What was affordable before may not be now. To make the best affordability assessments and meet responsible lending obligations, organisations need a comprehensive understanding of an individual’s spending and debt. Experian Affordability solutions offer a holistic view, allowing swift and precise calculation of disposable income.
  • Affordability monitoring – Ongoing affordability monitoring is crucial amid consumer financial uncertainty. Experian Affordability solutions allow banks to utilise their own data for continuous affordability monitoring to identify financial vulnerability, changes in income and expenditure, and whether they’re turning to other credit products to help manage their finances.

If we can assist your business in making well-informed affordability assessments throughout the customer lifecycle, please get in touch with us using the form below.


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