Speculation that rising interest rates will force a number of borrowers to default on their mortgages is “being materially overplayed”, according to Citi economists.

Analysts Brendan Sproules and Akshat Agrawal say above-median household incomes are giving borrowers better financial flexibility to meet repayments, despite the RBA increasing the official cash rate to 1.35%.

S&P Global Ratings analyst Erin Kitson says mortgage arrears are at historically low levels and she doesn’t expect a significant increase in defaults, “given a strong labour market and the buffers built into serviceability assessments”.

Kitson says borrowers built up their savings during the pandemic as well as their repayment buffers and they will use that to help absorb higher mortgage repayments.

“While savings buffers have been declining from their pandemic highs as the economy has reopened, they remain above the long-term average of 5%,” she says.

Sproules and Agrawal say while there is no doubt Australia property is expensive and mortgages large, most borrowers can still meet repayments.