Signs of Mortgage Stress – Forbes Advisor Australia

With interest rates rising, Australian borrowers are now being forced to make higher mortgage repayments. In fact, an Australian with an average $500,000 25-year mortgage is paying an additional $76.45 a month on their mortgage due to the last 0.25% increase in October.

For those with a $1 million mortgage, that additional monthly repayment after the last increase is more than $150 a month. And since the RBA began raising rates in May, the same mortgage borrower would have seen their monthly repayments increase by more than $500.

These rate hikes and subsequent repayments are putting more and more Australians at risk of mortgage stress.

Roy Morgan Research reports that 942,000 Australians are currently experiencing mortgage distress. If the RBA hikes rates again in November – which is likely to happen – that number would increase by 158,000 Australians to a total of 1.1 million – the highest since July 2013.

What exactly is mortgage stress, why is it increasing in Australia and how can you avoid becoming a victim of it yourself?

What is mortgage stress?

Mortgage stress is the term economists and real estate experts use when a household is struggling to make their mortgage payments.

Real estate economist and director at Property Resolutions, Mark Wist, says he believes there are two types of mortgage stress: conventional and psychosomatic.

“Traditionally, mortgage stress occurs when interest payment obligations eat up a more than comfortable chunk of a household’s budget,” says Wist.

“The threshold is often estimated to be around 30% to 35% of gross income, above which concern builds as other household financial commitments and hard costs are affected.”

While any mortgagor who pays more than 35% of gross household income could be classified as mortgage distressed, there is no official definition due to the many factors that contribute to it, explains Wist.

“For example, if the mortgage lender had the ability to increase income at will, that stress could be alleviated. Likewise, if the mortgage lender is behind on payments, there may be a buffer that can be drawn on for a period of time to offset increased interest obligations.”

The psychosomatic response Wist points to is fear of the impact that unknown rate hikes could have on the household budget.

This fear can prompt a household to reduce spending in anticipation of rising mortgage interest payments – which “at the aggregate level can affect GDP and overall demand for goods and services.”

“This underscores why the Reserve Bank is raising interest rates — to slow the rate of inflation in the economy by limiting consumer spending capacity,” Wist said.

How do you know if you are in mortgage stress?

There are numerous tools available online that can help you understand if you are in mortgage distress by calculating what percentage of your income goes toward your mortgage payments. This is known as your mortgage-to-income ratio.

Keep in mind that there are additional significant costs associated with owning property – such as repairs, maintenance and home insurance – that also need to be considered.

Once your mortgage-to-income ratio is calculated, it’s easy to decipher where you stand in terms of mortgage stress. If your score is less than 20%, you are not in mortgage stress or at risk in the near future.

If you spend between 20-30% of your income on repayments, you run the risk of experiencing mortgage stress if interest rates continue to rise or if your financial situation changes, e.g. B. if you lose a job or other stream of income.

If you’re spending 30% or more of your income on mortgage payments, you’re already in mortgage stress.

“Beyond that 30-35% threshold, the stress is indeed there, but not everyone is going to experience it in the same way,” Wist reiterates.

Signs of mortgage stress

While it’s easy to use a quantitative number to define mortgage stress, there are also some non-numerical measurements that can show that you’re suffering from mortgage stress — even if you’re not necessarily in the 30%+ income-to- Mortgage situation fall ratio.

One of these signs is that you no longer have the means to afford luxuries, such as eating out, going to the movies, or ordering take-out. This may also include withdrawing from any chargeable social activity, whether it is your own activity or that of your loved ones.

Another sign may be that you may find yourself in a situation where you are living paycheck to paycheck and find that you are making certain unexpected expenses – such as B. a doctor’s bill or a car service – can not budget. Instead, you rely on asking friends and family for help, using credit cards, or taking out personal loans from the bank.

What Causes Mortgage Stress?

As Wist explains, the problem with mortgage payments is that they’re neither optional nor arbitrary: you can’t avoid them, and you don’t choose how much you want to pay under a minimum.

“In contrast, you can — at least to some extent — control how much is spent on food, energy, entertainment, etc.,” says Wist.

“The mortgage payment is therefore often seen as the cornerstone of the household budget around which other obligations must grow.”

This means that mortgage stress can arise for a myriad of reasons, including personal circumstances such as losing a job affecting finances; an increase in expenses in other areas of life, e.g. B. at the birth of a child; or due to changes in the economy.

Why are mortgage stress rates rising in Australia?

The reason behind the growing number of Australians currently suffering from mortgage distress is largely due to economic turmoil.

As mentioned above, interest rates are rising exponentially due to the RBA’s recent decisions to raise interest rates to curb the country’s high rate of inflation. But inflation is also affecting the cost of living, keeping wage growth at stagnant levels.

Suddenly, people are expected to pay more for their mortgage payments, have to pay more for other living expenses when the CPI is also rising, and see their wages growing out of step with inflation.

In fact, Choice’s latest report found that 90% of Australians have experienced an increase in their household bills and spending over the past year. The nationally representative survey also found that concerns about disposable income have increased, showing nearly three in five households feel they no longer have enough.

In addition to current pressures on the cost of living, Wist has it to do with “the combination of FOMO and TINA.”

“FOMO – Fear Of Missing Out – caused some buyers to enter the market when they weren’t ready and this extra demand combined with fewer offers drove prices higher while TINA (There Is No Alternative) these buyers encouraged them to pay those higher prices,” explains Wist.

“This was at a time when the Reserve Bank and economists were touting interest rates that would ‘stay low longer’.

“It turns out that with a complex interaction of latent demand, driven in part by financial support and supply constraints, prices are rising rapidly, which has quickly pulled interest rates higher, despite ‘longer low’ forecasts.

“Those who bought homes at high prices with maximum mortgages are now facing higher interest payments given larger-than-average mortgages with higher interest rates — the worst of both worlds.”

How to avoid mortgage stress

Despite the sad news surrounding mortgage stress, there are still ways to avoid or eliminate mortgage stress, according to Wist. These include:

  • Consider a fixed-rate mortgage that ensures the level of interest payments.
  • Ask the lender if it is possible to switch to an interest-only contract, which would reduce the periodic payments by the amount allotted for principal payments.
  • Add an equalization feature to your mortgage that assigns positive interest to the additional principal held in the account to reduce the interest burden. and
  • Clean up with the lender: It’s far better to have an honest conversation that can allow the lender to restructure payments. Once violations occur, the opportunity for them may be gone.

frequently asked Questions

What is the mortgage stress test?

The mortgage stress test simply refers to calculating what percentage of your annual income goes towards your mortgage repayments and whether you are entering mortgage stress territory. There are numerous online calculators that can help you find this number, as well as calculators on government-backed websites that can help you figure out what repayments you can afford without getting into the mortgage stress.

Is mortgage stress calculated using gross or net income?

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