Top five reasons people get into mortgage stress
Mortgage stress is never far from the news in Australia.
With years of historically low-interest rates and a booming property market, home ownership became within the reach of millions.
But the flipside of realising ‘the great Australian dream‘ of home ownership is suffering financial stress so severe that you can risk losing your home.
The reality is now sinking in for millions of mortgage holders after last week’s 50 basis-points interest rate rise.
Current data from the Australian Prudential Regulation Authority (APRA) shows that 280,000 Australians are most at risk from rising rates having borrowed six or more times their income and/or having loan-to-value ratios of more than 90 per cent.
This is out of one million loans taken out in the past two years, which the Reserve Bank of Australia (RBA) thinks are most at risk of tipping into mortgage stress with multiple rate rises.
The RBA estimates that a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period.
RBA data showed that the cost of living had hit a 22-year high, rising to 5.1 per cent from the year to March 2022. This has left the RBA with little choice but to hike rates multiple times this year.
The June 2022 rate increase is the largest increase in 22 years, this was the same time the Olympics were in Sydney.
There is now a whole generation of first-time borrowers who have only experienced rate decreases, not increases.
The cost of living has increased and will continue to do so. The March 2022 quarter headline inflation number of 5.1% doesn’t reflect the upcoming price hikes which are predicted to bump up inflation to 7%.
Electricity prices are set to increase on average by 18% from 1 July 2022. Groceries have continued to rise and are forecasted to increase by another 12% throughout 2022.
Fuel prices are increasing due to global events despite the recent fuel excise tax relief. HECS debt was increased by 3.9% on 1 June 2022.
The cost of renting a house has soared by up to 21.2% in Australia’s capital cities, with further rises expected as the national rental crisis deepens.
For many people, mortgage stress from these interest rate rises has become a reality. They would come under increased financial pressure and financial stress, with a greater risk of defaulting on their mortgage and losing their home.
But the reasons for mortgage stress are not quite as simple as we might think: interest rates might go up.
In this article, we look at the top five reasons people come under mortgage stress.
What exactly is mortgage stress?
In general terms, mortgage stress occurs when a household has trouble meeting all its bills and repayments and its ability to make mortgage payments comes increasingly under pressure.
But there are more specific definitions too.
The most widely accepted definition is that mortgage stress is triggered when a household with a moderate or low income spends 30 per cent or more of its pre-tax income on home loan repayments.
Digital Finance Analytics defines mortgage stress more simply – as when homeowners spend more on repayments and other living costs than they earn.
Reason one: Borrowing more than you can afford
‘It is common for people to think about what interest rates are now rather than what they might be in the future,” says Hamish Ferguson, a director of Vision Property and Finance.
It’s important to consider whether you could still afford mortgage repayments when conditions change – as they are.
“I recommend that you can still afford the property at 6 per cent interest rates,” Mr Ferguson said.
On the average Australian home loan, which is currently $595,000, an extra three per cent would cost over $1,000 extra for each monthly repayment, or $400,000 over the life of a 30-year loan.
Not having enough money to prepare properly for the expenses related to property ownership – such as maintenance or improvements that may happen over time – trips up homeowners. You can ask yourself the question can I really afford to buy.
Reason two: Major changes to your situation
Lost a job, suffering ill health and experiencing major family changes can throw people into mortgage stress.
Some people purchase property with two incomes, then have one or more children, and find the loss of one full-time income as well as the increased family expenses hit hard.
“A lot of people don’t have sufficient insurance to cover their income if they fall sick or have an accident,” Mr Ferguson said.
Many people live as if their current situation won’t change and don’t build up enough of a buffer to reduce the shock of major changes.
Then when an unexpected large expense comes up they don’t have the reserves.
Life changes, and we need a financial buffer.
“‘I remember reading that around 30 per cent of people couldn’t find $3,000 if they needed it,” Mr Ferguson said.
Reason three: Interest rate increases
Without question, changes to interest rates do cause mortgage stress but the higher repayments change the equation people have relied on.
Banks today put a minimum 3 per cent buffer on loans so they are working out affordability.
“Generally, though once people have bought, they slowly relax on their lifestyle, or their lifestyle becomes more expensive,” Mr Ferguson said.
It is important to remain mindful about our finances throughout our lives and they unlock freedom when in good shape – or cause a huge range of negative impacts when financial stress emerges and becomes chronic.
Reason four: Taking on too much debt
Often within two years of purchasing a property, many people will upgrade their car or take out some other type of loan.
“When this happens there’s usually not sufficient preparation for other expenses or loans,” Mr Ferguson said.
“People are generally not aware of how this new debt can impact on their financial stability if a few large expenses crop up.”
Reason five: Poor communication
It sounds obvious, but good communications usually make sense but in practice, we know they are anything but simple.
“It is surprising how often one person in the household is keeping an eye on the finances,” Mr Ferguson said.
As their financial position becomes tighter and tighter over time, that person doesn’t communicate properly with the other member/s until it is almost too late.
In committed relationships and families, it’s far better to schedule a time to talk openly about finances and not leave the burden on one person.
It’s also much healthier if one person is not taking control of all of a household’s finances either.
Sharing information and responsibility is a better strategy.
What can you do about being in mortgage stress?
If you are obviously under mortgage stress there is one golden rule: do not ignore it.
The consequence of hoping it will go away become severe and very quickly losing your home is a realistic outcome.
First, you should speak to your lender or mortgage broker and try to make temporary arrangements. Ask for help.
The bank doesn’t want you to default on your mortgage and they can try to pull a few levers to try and make sure this won’t happen.
They are obliged to offer hardship assistance and be flexible around repayment arrangements, at least temporarily.
But you still need to make up for the shortfall.
You are likely to need financial counselling help too.
A great place to start is the National Debt Helpline on 1800 007 007 which can help you find a free (government-funded) financial counsellor in your local area.
The National Debt Helpline has several practical solutions which you can read through but it is strongly advised to make contact and work through your specific circumstances with a financial counsellor.