Many Australians are facing difficulties in repaying their mortgage because of the rise in bank driven interest rates and flat wages.
According to a new report by Digital Finance Analytics (DFA), in August 2018 the number of households fell into mortgage stress increased from 990,000 to 996,000.
It is believed that over 30 per cent of households are in mortgage stress.
In this report, household stress is defined as being in stress or tension when their net income does not cover ongoing costs. These households may have paid ahead on their loan, or have other assets to pay the mortgage, but most manage by cutting back on household spending or seeking to refinance their loan. Those in severe stress are defined as being unable to meet repayments from current income and are often forced to sell.
According to the recent article in AFR, a data analysis shows that a property buyer on an average income with a standard principal and interest mortgage is paying a higher percentage of annual disposable income on repayments.
Source: Flickr - Ken Teegardin (CC BY-SA 2.0)
Banks are responding to the growing debt pressure with stricter lending conditions and review of the ability of all customers to pay off the debt.
Biren Joshi, Director of Excel Financial Solution, shared that there are several factors to put a higher number of households in mortgage stress.
"Events, such as the hike in some mortgage rates, the council rate demands, rise in living costs and flat incomes continue to affect home," said Biren Joshi.
Mr Joshi also shared that in some areas home prices are falling due to number factors like lower income, banks driven increase in rates and most importantly banks tightening up the lending which may lead towards the negative equity.
"Reserve Bank is yet to make any change in rates. Banks have increased rates independently. Once Reserve bank starts increasing the rates the borrower will feel more pain. " - added Mr Joshi.
According to Biren Joshi, one the primary factor that could cause mortgage stress is interest-only loans. Interest only have been oversold to borrowers, and this could lead to stress when the interest-only period of 5 years expires between 2018 to 2022.
How to reduce mortgage stress?
Mr Biren Joshi says, "On this issue, The last report was published by The Centre of Policy Development and the University of Canberra, and as per its findings many Australians tends to be over-confident that they can repay loans. We do not consider the likelihood of things potentially going wrong in our lives."
Mr Biren Joshi explained that it is not possible to make your loans and its repayments completely stress-free, but there are a few things that may help to reduce the anxiety.
Source: CC0 Creative Commons Pixaby
1. Build up a shield
It’s a good idea to keep or make up a cash reserve in a mortgage offset account. This amount or saving can be drawn upon to meet loan repayments in case of some emergency like illness, loss of work or any other reason.
2. Insurance
Securing your income is essential, and you can do it by having adequate personal insurances. Mr Biren Joshi advises consulting your Bank and insurance agent to get detail information on how insurance can help you in some extremely critical situation. Here are some examples to help:
Income protection insurance -
Income protection insurance can replace up to 75% of income if the person can not go to work due to illness or injury. The insurance may help you to continue meeting the majority of your living expenses, not just your loan repayments.
Critical illness insurance -
Critical Illness Insurance can help you to pay off your loan and meet a range of expenses if you suffer a specified illness, such as cancer or a heart attack.
Total and permanent disability insurance -
Total and Permanent Disability Insurance can help you to pay off your loan and provide an ongoing income if you become totally and permanently disabled.
Life insurance -
In many cases, Life insurance can also be used to pay off your loan.
3. Mortgage protection insurance
Mr Biren Joshi laughed and said, "I am again talking about insurance, but I will say mortgage protection insurance is highly recommended. Many banks nowadays offer the mortgage protection insurance with a good deal."
He further explained that the reason why many lenders offer insurance when you take out a home loan is to cover a specified amount from your total mortgage amount.
4. Interest rates
It's always a million dollar question to go for fixed interest rates or variable. Mr Biren advises on fixing the interest rate on your home loan. This step can protect rising interest rates, but the downside of fix interest rate is, there are restrictions on making additional payments. Many people a combination of fixed and variable rate loans works best because they can make extra repayments into the variable rate portion of the debt.
5. Credit cards
"Try to avoid using credit cards for loan repayment, this practice is like you use debt to pay debt is very likely to compound the problem." Mr Biren Joshi added.
Mr Biren Joshi advises reviewing your situations regularly.
"It is essential to review your case regularly - before you decide how much amount you want to borrow as well after you borrow money. " - Biren Joshi
"If something is not right or something you consider as the first sign of a problem for you then don't hold back," - says Mr Biren Joshi. It’s essential to seek advice from your bank or financial planner, and there is a range of options available to help you to make your repayments easier.
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