Signs of Mortgage Stress – Forbes Advisor Australia

With the rising cash rate, Australian borrowers are now being forced to make higher repayments on their mortgages. In fact, due to the last 0.25% rise in October, an Australian with an average 25-year mortgage of $500,000 will now be paying an additional $76.45 on their mortgage per month.

For those with a $1 million mortgage, that extra monthly repayment will be over $150 per month after the last hike. And since the RBA started raising rates in May, that same mortgage borrower has reportedly seen their monthly repayments jump by more than $500.

These rate increases and subsequent repayments mean that more and more Australians are facing the risk of mortgage stress.

Currently, there are 942,000 Australians in mortgage trouble, according to Roy Morgan Research. If the RBA raises rates again in November, which it is expected to do, that number would rise by 158,000 Australians to a total of 1.1 million, the highest since July 2013.

So what exactly is mortgage stress, why is it on the rise in Australia and how can you avoid falling victim to it yourself?

What is Mortgage Stress?

Mortgage stress is the term used by economists and property experts when a household struggles to meet their mortgage payments.

Property economist and director of Property Resolutions, Mark Wist, says he believes there are two types of mortgage stress: one conventional and the other psychosomatic.

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

“The threshold is often considered to be around 30% to 35% of gross income, above which concern increases as other household financial obligations and essential costs begin to be affected.”

While any mortgagor paying more than 35% of their gross household income can be considered mortgage distress, there is no official definition, Wist explains, due to the many contributing factors.

“For example, if the mortgagor had the ability to increase his income at will, this stress could be alleviated. Likewise, if the mortgagor is ahead of payments, there may be a buffer that can be drawn down for a period of time to offset the increased interest obligations.

Meanwhile, the psychosomatic response Wist refers to is fear of the impact that unknown interest rate increases could have on household budgets.

This fear may cause a household to reduce spending in anticipation of an increase in mortgage interest payments, which “when viewed at the aggregate economic level, may affect GDP and general demand for goods and services “.

“It underscores why the Reserve Bank is raising interest rates — to slow the rate of price increases in the economy by limiting consumers’ ability to spend,” Wist said.

How do you know if you are in mortgage stress?

There are many tools available online that can help you understand if you’re in mortgage trouble by calculating what percentage of your income is spent paying off your mortgage. This is called your mortgage-to-income ratio.

Keep in mind that there are significant additional costs associated with owning a property, such as repairs, maintenance and home insurance, which also need to be taken into account.

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

Spending 20-30% of your income on repayments would put you at risk of mortgage stress if interest rates were to rise further or if your financial situation were to change, such as if you lost a job or another source of income.

If you’re spending 30% or more of your income paying off your mortgage, you’re already in mortgage trouble.

“Above that 30-35% threshold, the stress is real, but not everyone will feel it the same way,” Wist recalls.

Signs of Mortgage Stress

While it’s easy to use a quantitative number to define mortgage stress, there are also non-numerical measures that can show you’re experiencing mortgage stress, even if you don’t necessarily fall into the over 30% bracket. income in relation to the mortgage. report.

These signs include no longer having the funds to afford luxuries, such as dining out, going to the movies, or ordering takeout. It can also include withdrawing from paid social activities, whether these are your own activities or those of your dependents.

Another sign can be when you’re in a situation where you’re living paycheck to paycheck and can’t budget for some unexpected expense, such as a medical bill or car service. Instead, you have to ask friends and family for help, use credit cards, or take 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 discretionary: you can’t avoid them, and you don’t choose how much to pay below a minimum.

“In contrast, one can control – at least to some extent – ​​how much is spent on food, energy, entertainment, etc.,” Wist explains.

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

This means that mortgage stress can arise for a myriad of reasons, including personal circumstances such as job loss impacting finances; increased expenses in other areas of life, such as having a child; or due to changes in the economy.

Why are mortgage stress rates rising in Australia?

The reason for the growing number of Australians who are currently experiencing mortgage stress is largely due to economic turmoil.

As mentioned above, interest rates are rising exponentially due to recent decisions by the RBA to raise the cash rate to curb the country’s high inflation rate. But inflation also affects the cost of living and keeps wage growth stagnant.

Suddenly people are expected to pay more for their mortgage payments, have to pay more for other living expenses as the CPI also rises, and don’t see their salaries rise in line with inflation.

In fact, Choice’s latest report found that 90% of Australians have seen their household bills and expenses rise in the past year. The nationally representative survey also found concerns about disposable income have risen, showing almost three in five households feel they no longer have enough.

Along with current cost of living pressures, Wist thinks it has 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 necessarily ready and this additional demand mixed with less announcements drove prices up, while TINA (It doesn’t there’s no alternative) encouraged those buyers to pay those higher prices,” says Wist.

“This was at a time when the Reserve Bank and economists were touting interest rates staying ‘lower for longer’.

“It turns out that with a complex interplay of latent demand driven in part by covid financial support and supply constraints, prices are beginning to rise rapidly, which has led to a rapid rise in interest rates, despite the “lower for longer” forecast.

“Those who bought property at high prices with maximum mortgages now face higher interest payments given the higher than normal mortgages with higher interest rates – the worst of both worlds. ”

How to Avoid Mortgage Stress

Despite the dire news surrounding mortgage stress, Wist says there are still ways to avoid or levitate mortgage stress. These include:

  • Consider a fixed rate mortgage which would provide certainty in interest payment amounts;
  • Ask the lender if it is possible to switch to an interest-only contract, which would reduce regular payments by the amount spent on principal repayments;
  • Add an offset feature to your mortgage, which allocates positive interest to any additional principal in the account to reduce the interest charge; and
  • Take the lead with the lender: It’s best to have an honest conversation that can allow the lender to restructure payments. Once violations begin to occur, the opportunity may be passed.


What is the Mortgage Stress Test?

Mortgage stress testing simply refers to calculating the percentage of your annual income spent on mortgage payments and whether you are entering a mortgage stress zone. There are plenty of calculators online that help find this figure, as well as calculators on government-backed websites to help you figure out what repayments you would be able to afford without getting into mortgage stress territory.

Is mortgage stress calculated on gross or net income?

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