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More home owners fall behind on loan payments

More home owners fall behind on loan payments

There has been a slight increase in the number of borrowers falling behind on their mortgage repayments by one month or more in the final quarter of 2012, according to the latest Fitch Dinkum Index.

Despite a low interest rate environment, stable house prices and living costs as well as low unemployment, the Index reveals the number of home loan borrowers in arrears of 30 days or more on mortgage repayments increased to 1.46 percent, up 10 basis points compared to the September 2012 quarter.

Average lender’s mortgage claims are also still rising, according to the Index.

Michelle Hutchison, spokeswoman for RateCity, said the findings are troubling, considering recent improvements in market conditions.

“It’s likely that many of these borrowers have locked themselves into a home loan that they clearly can’t afford,” she said.

“Interest rates are at record lows so if borrowers can’t afford to keep their mortgage repayments on track now, they could be in serious trouble when rates rise.”

The mortgage stress situation is even more acute for many first home buyers, according to a separate study conducted late last year.

Research house Digital Finance Analytics found 16 percent of Australia’s first home buyers were under mortgage stress, and predicted that the number of suburban homes dealing with mortgage stress would continue to rise this year.

According to the Reserve Bank, a borrower is likely to be in mortgage stress if spending 30 per cent or more of income on monthly repayments.

The key to avoiding mortgage stress is to not overextend the budget, said Hutchison. So for an annual household income of $70,000, mortgage repayments should not exceed $1750 per month.

“Above that borrowers are at greater risk when interest rates rise and they are more susceptible to reductions in their income,” she added.

“A good idea is to compare home loans and use a mortgage calculator to determine what the monthly repayments will be as a proportion of your household income before you take on debt.”

Financial adviser Deborah Kent, of Integra Financial Services, agrees that the only way to prevent your mortgage stress is to avoid over-extending yourself. Her tip? Don’t be seduced by historically low interest rates to sign up for a big first mortgage – instead, calculate what your repayments would be at a higher rate, such as 7 or 8 percent, and choose a mortgage accordingly.

“Work out if you can survive if the interest rate rises to 8 percent,” Kent said. “Preparation is very much the key to avoid running into financial problems later on.”

“Especially when interest rates are low and people are tempted to borrow more. But ask yourself, ‘do I really need the $1 million house or can I spend $800,000 and upgrade later?’”

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