Home insurance costs are becoming a significant financial threat to many Australian households and, in turn, to the banks backing their mortgages. While homeowners have traditionally made mortgage payments their top financial priority, growing premiums linked to climate events and emerging hazards are beginning to disrupt that focus. This shift is prompting concern across the finance sector.
In the past year, over 1.6 million households, or 15% of the population, have faced insurance costs exceeding four weeks of gross income. This figure has risen from 12% in 2023 and 10% in 2022. The increase reflects not only the frequency of climate-related disasters but also expensive repair issues such as widespread flexi pipe failures and fires caused by lithium batteries. These hidden risks are pushing up average claim sizes, raising insurers' costs and inflating household insurance bills.
For banks with large exposure to the housing loan sector, the implications are serious. Current data suggests about 5% of households with mortgages, representing $57 billion in loans, are already strained by rising insurance costs. Although interest rates may be falling slightly, ongoing premium increases in the mid-single digits are likely to offset any short-term financial benefit.
Additional pressures are adding to the problem. Low building standards, a shortage of skilled trades and evolving risk profiles from new technologies are all contributing to growing financial stress. At the same time, a rise in theft and damage claims involving expensive vehicles, often connected to youth crime in lower-income areas, is adding further pressure on insurers and impacting policyholders.
There is also a clear regional divide. Southeast Queensland is experiencing the highest number of households facing premium stress, followed by regional Western Australia, the Northern Rivers in New South Wales and the Northern Territory. In these areas, climate risks are driving insurance costs to levels many can no longer afford.
This emerging affordability issue may not yet be fully reflected in broader financial markets, but experts are warning of potential consequences. If widespread lapses in home insurance occur, banks could be forced to reassess the security of their loans. At present, this situation represents a growing risk that banks, regulators and homeowners can no longer overlook.
