10 Dec 2018
Debt Management
Are you experiencing mortgage stress?
By Emily Matthews | Financial Advisor at Future Key Financial

Mortgage stress commonly occurs when 30% or more of home owners income is being directed onto their mortgage repayments.

With interest rates at record lows, its concerning that 30% of owner-occupied homes across Australia homes are already experiencing mortgage stress. This equates to almost 1-million properties Australia wide; mainly in Sydney and Melbourne.

If 30% of owner-occupied homes across Australia are already experiencing mortgage stress, what’s going to happen to these households when interest rates rise? How many more households will be experiencing mortgage stress? How many Australian’s will default on their home loan? How will this impact our economy?

This concern is shared with our Government and RBA and provides some insight as to why RBA have continued to hold cash rates at 1.50% for 27 consecutive months.

The RBA is acutely aware of the potential and additional mortgage stress Australians will face with raising cash rates. The RBA are constantly considering these factors along with the lack of income growth, unemployment rates and continual increase in living costs.

What is the Government doing about this?

The Royal Commission (RC) recently enforced tighter lending requirements on banks. particularly lending requirements in association with properties held through Self-Managed Superannuation Funds (SMSF). To find out more about the RC SMSF property findings, refer to my blog here.

Additionally, Interest Only loan offerings have been significantly reduced for new property purchases or loan refinances.

Recent tax cuts commencing 1 July 2018 were introduced to help sustain household expenditure. The Government was also reviewing proposals for reduced electricity rates before the spill. Electricity prices have since been removed from the Governments main agenda.

The average mortgage nationally is just under $500,000 and 1 in 4 owner-occupied loans are interest only. Let’s put a scenario together to really understand the potential impact raising interest rates can have:

Consider a mortgage home loan of $500,000 with 4% interest associated to the total loan. 50% of the loan value is considered interest only for the first five years and 50% of the loan is considered principal and interest. Assuming the loan has recently been taken out for a 30-year term, the principal repayment due per annum would be $8,333 (not including any bank fees). The interest payable on this home loan would be $20,000 per annum. Total repayments equating to $28,333 per annum or $2,361 per month.
Now, if interest rates rose by 2%, the interest payable would increase to $30,000 per annum. Total payments therefore increasing to $38,333 per annum or $3,194 per month (not including bank account fees).
By interest rates increasing by 2% per annum, monthly repayments have increased by almost $1,000.
If we considered the financial impact once the interest only period ceased, principal repayments would now be assessed on 100% of the home loan. Meaning the mortgage repayments will increase by a further $8,333 per annum, totaling $46,666 per annum or $3,889 per month (not including bank fees).

That’s a staggering increase and a concerning jump in annual expenditure if you are not expecting and are not prepared for it.

Although 2% is a reasonable increase to consider for the short-term (0-3 years), what if interest rates increased greater than 2%? How will this affect your livelihood?

If you are already experiencing mortgage stress, or feel that you will when interest rates rise or once your interest only term ceases, contact us today for a complimentary discussion on how you can regain control of your finances.