Mortgage defaults rise, Analysts warn there’s more to come

Mortgage defaults rise, Analysts warn there’s more to come

Record low property prices and decreasing loan costs haven’t helped a growing number of people who have fallen behind on their mortgage repayments, in a trend that’s only expected to get worse when support from both banks and the government dries up.

The number of Australians more than 30 days late on their mortgage repayments increased by 0.05 to 1.99 per cent in the year to May 2020, the analysts at Moody’s said. Delinquency rates were more commonly up in capital cities than states, including Melbourne, Sydney, Darwin, Brisbane and Perth.

“Mortgage delinquency rates increased in 40 Australian regions over the year to May and fell in 47 regions,” the analysts said.

“Over the next year, mortgage delinquency risks will be high in regions with large economic and labour market dependence on industries such as tourism, hospitality and retail, which have been hit hard by coronavirus disruptions.”

The findings reveal how relief measures may not be enough to help everyone recover from the turmoil induced by the COVID-19 pandemic. The low interest rates and falling property prices have however helped people spend less of their income servicing their mortgage.

The best and worst performing areas

Three states had generally rising delinquency rates over a 12 month period until May 2020.

The percentage of people that were 30 days late or more on their mortgages increased by 0.29 per cent in the Northern Territory, pushing its delinquency rate to 2.71 per cent. This was the largest increase registered across the country.

Victoria’s delinquency rate increased by 0.20 to 1.85 per cent -- its highest level since 2005. Meanwhile, New South Wales’ increase of 0.23 pushed its rate to 1.71 per cent -- a record high not seen since 2013.

Distressed sales are expected to rise next year

The rise in mortgage delinquencies appears to support forecasts that a growing number of houses will go on the market next year because owners can’t afford the repayments.

The problem is expected to hasten then as bank loan deferrals expire and government support payments diminish.

“Coronavirus-related government income support measures and lender loan payment deferrals have curbed mortgage delinquency rates in 2020 However, these relief measures will end in 2021, contributing to mortgage delinquencies,” Moody’s said.

“Household incomes will come under pressure when the government's Jobkeeper and Jobseeker programs end next year. Lower incomes will constrain borrowers' abilities to make mortgage repayments.”

An influx could lead to falling house prices and a delayed recovery

The Reserve Bank of Australia estimates about 15 per cent of homeowners who deferred their mortgage are unlikely to be able to resume their repayments. They warn this could lead to a fraction of them selling their property below their value.

“If many borrowers were to attempt to sell because they are unable to meet their repayments, and demand is weak, housing prices could fall,” the RBA said, in its biannual financial stability report.

“Large and sustained price falls could lead to losses for borrowers and lenders.”

Property values would likely fall in pockets or regions where there’s a concentration of distressed sales, Bill Evans said, chief economist at Westpac.

“If 10 per cent of loans currently in deferral wind up on the market, that would see 60,000 ‘urgent’ sales … – likely enough to shift prices, particularly in areas where there are higher concentrations of these sales and demand is softer.”

The projection of 60,000 urgent sales is a high end estimate, Mr Evans said, and the bank anticipates the number to be lower.

Housing prices have fallen for the last five months, shedding about $12,500 since the beginning of the year.

If a lot of properties were to be listed in an area because the owners couldn’t afford their mortgage repayments, it could lead to property prices there falling and delay the housing market’s recovery.

There’s still options to help people make their repayments

Banks are in the process of contacting half of all of the people who have deferred their mortgage repayments to evaluate their options.

The conversations -- being had with about 450,000 of 900,000 mortgage holders -- effectively offer three options.

1. Restructuring their loan

Converting to an interest only loan for a period of time or increasing the term of the loan could lower mortgage repayments and help people resume payments quicker.

The financial regulators have warned this option should be undertaken when it’s in the financial interest of customers.

2. Extending mortgage holidays

Financial regulators have paved the way for mortgage deferrals to be extended for a further four more months.

Interest continues to be charged on deferred mortgages, and so the reprieve of a mortgage holiday may be offset by the potentially thousands of dollars added to the loan.

There is a hard end date for mortgage deferrals: 31 March, 2021.

3. ‘Tailored options’ -- may include downsizing

Others who can’t afford to pay their mortgage “over the longer term will be offered tailored assistance that addresses their needs,” the Australian Banking Association has said.

Executives at three of the four big banks have said customers may need to downsize their home or investment if they find they are overextended in the current financial climate.

 

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Learn more about home loans

What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

What percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

Which mortgage is the best for me?

The best mortgage to suit your needs will vary depending on your individual circumstances. If you want to be mortgage free as soon as possible, consider taking out a mortgage with a shorter term, such as 25 years as opposed to 30 years, and make the highest possible mortgage repayments. You might also want to consider a loan with an offset facility to help reduce costs. Investors, on the other hand, might have different objectives so the choice of loan will differ.

Whether you decide on a fixed or variable interest rate will depend on your own preference for stability in repayment amounts, and flexibility when it comes to features.

If you do not have a deposit or will not be in a financial position to make large repayments right away you may wish to consider asking a parent to be a guarantor or looking at interest only loans. Again, which one of these options suits you best is reliant on many factors and you should seek professional advice if you are unsure which mortgage will suit you best.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.