Mortgage stress affecting 40% of households, despite property market aflush with stimulus

Mortgage stress affecting 40% of households, despite property market aflush with stimulus

Billions of dollars’ worth of government and bank support has failed to put a lid on mortgage stress, soaring to its highest level ever.

Out of every 2.5 owner-occupied households, one is experiencing mortgage stress, Digital Finance Analytics’ (DFA) rolling survey of 52,000 households found.

That figure crept up by 1.1 percentage points to 40.2 per cent in the month to July, and is equivalent to more than 1.5 million households who live in their own home. 

Victoria had the highest number of owner-occupiers in mortgage stress, at about 430,000.

But it was NSW that saw the biggest jump in stressed households, with the mortgage stress rate increasing by 1.8 percentage points to 38 per cent. This was followed by Victoria and the ACT, seeing growths of 1.6 and 1.2 percentage points respectively.

Nationally, the proportion of owner-occupiers under financial pressure from their mortgages has risen from about one third in February 2020.

DFA uses cash flow to determine whether an owner-occupier is in mortgage stress. A household is considered to be in mortgage stress when their outgoing costs exceed their net income.

The research also suggested that 2.8 per cent of all borrowing households could be in risk of defaulting, up from 2.7 per cent in the month prior.

Martin North, DFA principal, said the pandemic and the ensuing lockdowns have added to the financial strain families are experiencing, despite stimulus measures from the government and banks.

“As a result of the economic slowdown, which was already underway before COVID, and exacerbated by the COVID restrictions, more households are falling into financial stress,” he said.

“In the round while the various government support schemes, and repayment holidays, plus rental freezes are assisting, the downward trajectory in finances is clear, and explains the rising stress.” 

Are property investors in mortgage stress?

About one quarter, or 832,000, of borrowing property investors are in mortgage stress. This is slightly down by 0.7 percentage points from the previous month.

However, the number of those in “severe stress”, about 128,000, was up by about 2,500 from June.

Twelve per cent of investors are “actively considering selling”.

Mr North noted there was a rise in tenants who are struggling with rent repayments, with almost 35 per cent of tenants in rental stress.

“There is confusion for some as to whether their rents are on hold, or simply accruing. We are seeing more households planning to move back with family and friends,” he said.

Melbourne CBD had the highest number of investors in mortgage stress, with some 4,300.

“We expect the banks to be tougher on property holders in these high-risk areas, compared to others as the discussions about payment restarts after September,” Mr North said.

Will more people fall into mortgage stress?

Mr North anticipated that more households could be pushed into mortgage stress when home loan repayment deferrals end.

“We expect this to climb higher as support is moderated, and banks have hard conversations about recommencing repayments.”

Eliza Owen, CoreLogic’s Australian head of research, said it was “reasonable to expect a sharp rise in mortgage arrears”, and that urgent property sales could be on the rise as government stimulus measures taper in October

“This is when we are likely to see a rise in the number of households facing financial distress and a lift in urgent sales.”

It’s possible that home loan borrowers can save money by refinancing to a lower interest rate. More than 40 per cent of those on mortgages are considering refinancing due to COVID-19 and low interest rates, a RateCity survey found.

The lowest ongoing variable rate on RateCity’s database comes from Easy Street Financial Services, with an advertised rate of 1.95 per cent and a comparison rate of 1.99 per cent.

If you suspect you may be falling into mortgage stress and haven’t already accessed hardship measures with your lender, check out RateCity’s Relief Hub to see which lenders are offering assistance.

Lowest ongoing variable rates

Lender

Advertised rate

Comparison rate

Easy Street Financial Services

1.95%

1.99%

Freedom Lend

2.17%

2.17%

Reduce Home Loans

2.19%

2.19%

Homestar Finance

2.29%

2.32%

Mortgage House

2.29%

2.47%

Source: RateCity. Note: Correct as at August 11, 2020.

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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 much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

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.

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.

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.

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 can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

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.

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 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.

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.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out.