Households with mortgages have taken advantage of low interest rates to build their mortgage prepayment buffers.

According to the latest Reserve Bank Financial Stability Review, interest payments as a share of disposable income have declined by around 75 basis points since March 2020.

Inflows of mortgage prepayments into offset and redraw accounts accounted for around 4.5 per cent of household disposable income in the three months to August.

This is similar to the share of income going into offset and redraws over the same period last year.

Prepayment buffers on the majority of housing loans, excluding loans to investors and fixed-rate loans (where there are disincentives or an inability to prepay) have increased over the past year.

The RBA said only a small share of loans had small prepayment buffers in August last year and reduced them over the following 12 months.

The proportion of prepayment buffers equal to one month or less was 41 per cent in August – a modest increase since the middle of last year. The RBA said this was largely due to the increases in fixed-rate mortgage lending over that period.

It said fewer than 1 per cent of owner occupier borrowers have both high debt (a loan-to-income ratio of more than six times) and small prepayment buffer (less than one month’s worth of repayments).

“This share of vulnerable borrowers has declined since the start of the pandemic, in part reflecting lower interest rates and ensuing debt repayments,” the RBA said.