Double Bonanza for Home Owners
August 7, 2017
Planning for Retirement? Will you have enough?
August 11, 2017

Take our Mortgage Stress Test

At the end of 2014 statistics showed a significant decrease in the percentage of homeowners experiencing mortgage stress – from 28% to around 15%¹ – largely attributed to low interest rates. However, a further 15% of those surveyed were anticipating mortgage stress at some time in the future. Well it seems the future may be here…

In May 2017 a separate survey² indicated mortgage stress is on the rise. While influencing factors varied from area to area, in general large loans and flat wages were seen as driving forces. And this is at a time when interest rates are still relatively low – but on the move! According to the 2014 survey, the top five reasons for mortgage stress were:

  1. Higher cost of living
  2. Unemployment/redundancy
  3. Other debt obligations
  4. Fewer hours worked or lower pay
  5. Interest rate rises

But what if…

  • You lost your job
  • Interest rates go up (and lenders are currently raising some rates!)
  • Your health suffers and you are not able to go to work for an extended period of time

The survey showed that unlike a number of years ago (in the higher interest rate climate) interest rates were no longer the biggest cause (or potential cause) of mortgage stress. But what would happen if interest rates DID start to increase on top of the current stress factors?
Would you cope financially?
Many of us will experience financial stress at some stage of our lives.
Another recent study³ showed that 39% of Australians wouldn’t have enough savings to maintain their lifestyle or meet their commitments if they lost their income for 3 to 6 months. In fact, the same study showed an alarming 17% would find it difficult to access $500 to $1,000 in an emergency.

For millions of Australians, maintaining a lifestyle simply means paying the mortgage (or rent) and keeping on top of the bills. Not everyone takes an overseas holiday every year! When taking out a mortgage – and for most of us this is the largest amount of debt we’ll ever have – just ‘hoping’ for the best isn’t likely to pay the bills or mortgage should the unexpected occur.

What is mortgage stress?
Mortgage stress usually affects people paying more than 30% of their pre-tax income on their home loan repayments. This is the highest level of recommended financial commitment you should incur to maintain some ‘wriggle-room’ in your budget and stay out of financial trouble. Mortgage stress is a real issue for many home owners but there are ways to avoid it. And, if you do experience mortgage stress or get into financial difficulty, help is usually available.

 Do the mortgage stress calculation then give us a call if you’re over 30%.

STEP 1

Calculate your monthly (weekly or fortnightly) mortgage repayment.

STEP 2

Calculate your monthly (weekly or fortnightly) pre-tax income (combined if you share the mortgage).

STEP 3

Divide your pre-tax income by your mortgage repayment (= Step 1/Step 2). That’s your percentage of income you are spending on your mortgage.

STEP 4

If the result is close to or over 30% (0.3), then you need to call us before it’s too late.

Don’t be alarmed if this is you. There are many things we can do to help you with this. The important thing is to identify the potential stress before it happens.

Of course if your percentage is well below 30% then call us for a quote to help you get into the investment property market.

Stress test this!
Another stress test is to work out your mortgage repayments at a 2.5% higher interest rate and then do the same calculation. Again if your result is close to or over 30% we need to see you now. For example if you have a home loan of $350,000 over 30 years at 4.5%, your repayments would go up from $1,773 per month to $2,329 per month if rates were to rise by 2.5% (to 7% – the historical average). That’s $556 per month (or $128 per week)! It might even pay to do the same calculation exercise at a rate of 9% (about the highest it has been in the past decade – in late 2008) as a real safety net indicator.

1. Streets Ahead Genworth Homebuyer Confidence Index Sept 2014
2. Digital Finance Analytics (DFA)
3. BT Australian Health Index

*Disclaimer: This article is generic in nature. All investment decisions should be considered wisely and based on your personal and financial circumstances. Seek proper advice before committing to any course of investment action. This is not deemed as advice.

Comments

comments