Mortgage stress impacting more than 2 million property owners

Mortgage stress impacting more than 2 million property owners

The number of homeowners and property investors struggling with their mortgages is surging, as the ability of Australians to make repayments takes a beating.

About 2.3 million Australian property owners are under financial pressure with their mortgages, the latest research from Digital Finance Analytics (DFA) shows.

Owner-occupiers in mortgage stress edged up by 1.6 percentage points 39.1 per cent in June, equivalent to 1.47 million households, the survey of 52,000 households found.

Despite home loan interest rates plunging to the lowest on record, the owner-occupied mortgage stress rate is up about 6 percentage points from 32.9 per cent in February, before COVID-19.

But the mortgage stress rate is expected to rise to 40.3 per cent in August, when JobKeeper and JobSeeker will be tapered for many COVID-19 affected workers and households.

DFA principal Martin North noted that the proportion could be “lower in reality” if the government stimulus measures are removed gradually.

He pointed out that mortgage stress is an “early warning sign” of potential issues further down the track.

“Of course they may have assets like deposits, or put more on credit cards, but generally households under pressure spend less, hunker down, and some two to three years later, end up selling or even defaulting,” he said.

More property investors in mortgage stress

Meanwhile, some 830,000 property investors are “stressed” in terms of cash flow, as they are not making a sufficient income to balance out the property’s outgoings, including the costs of owning and letting their properties. This is equivalent to more than half of mortgaged investment properties.

Of these 830,000 investors, about 126,000 are considered to be “severely distressed”, with low occupancy or high repair costs being among the most common reasons for distress.

About 59 per cent of the 2.8 million property investors in Australia have a mortgage.

About 11 per cent of housing loans, worth a combined $192 billion, have been deferred temporarily, the latest data from the Australian Prudential Regulation Authority showed.

Is it a good time to refinance your mortgage?

Earlier this week, Reserve Bank of Australia (RBA) governor Philip Lowe urged those on a home loan to consider taking advantage of record-low home loan interest rates and shopping around for a better deal. 

“I encourage people who haven't already taken up the opportunity to do that to look at their mortgage rate and look for a better deal,” he said in an online speech on Tuesday.

With many battening down the hatches as the government tips the biggest federal budget deficit since World War II, it could be a good time to think about your own household budget and the interest rate on your home loan, likely to be your biggest debt. Three quarters of mortgage-holders don’t know their mortgage rate, according to UBank’s 2019 Know Your Numbers Index. Being uninformed about your debts doesn’t make it easy when you plan your budgets.

If you’re a property owner feeling the pressure from your mortgage, it may be an opportune time to refinance, either with your existing lender or with another bank. For some, it may even be possible to switch to a home loan with an interest rate below 2 per cent

Keep in mind that generally borrowers living in their own home may have a higher chance of securing a lower rate than investors. Those with more than 20 per cent equity in their property may also have a stronger chance.

Let’s say you’re an owner-occupier with a $400,000 home loan, on a 3.5 per cent interest rate over 30 years. If you refinance to a 3 per cent mortgage, it’s possible that you could bring your monthly repayments down by $110, a RateCity analysis showed. While this might not sound like a lot of money, you could be saving $1,320 in one year, or $6,600 in the first five years. This assumes that your rate doesn’t move again in those five years.

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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.

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.

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

How does a redraw facility work?

A redraw facility attached to your loan allows you to borrow back any additional repayments that you have already paid on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest. However you will still be able to access the extra money when needed.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

Mortgage Balance

The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

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.