Banking: Effie Zahos
High property prices and our appetite for debt are taking their toll
Aone-bedroom unit that was once a space in a roof cavity in Sydney’s prestigious suburb of Elizabeth Bay sold for $1 million last month. Yes, it has some impressive views but it came with just 50 square metres of living space and a shared balcony, and there was no garage. That’s $20,000 a square metre – talk about runaway house prices! It’s no wonder the Reserve Bank is concerned for our financial welfare. Our insane appetite for debt and a ridiculously overpriced property market is putting a lot of Aussies in a very delicate situation.
Digital Finance Analytics research shows 669,000 families (22% of borrowing households) are suffering mortgage stress. Of these, 20.8% are in mild stress, meaning they are making their repayments by cutting back on other expenditure, putting more on credit cards and generally hunkering down. However, the remaining 1% are in severe stress, meaning they are behind with their repayments, are trying to refinance or sell their property or are seeking hardship assistance. The RBA also revealed last month that despite interest rates sitting at record lows, a third of households have no mortgage buffer or are less than a month ahead on their repayments.
A home loan borrower is typically considered to be in mortgage stress when they are putting 30% or more of their pre-tax income towards their monthly repayments. When banks approve a loan they stress-test the repayments by assuming rates increase to around 7.25%. However, as Otto Dargan, managing director of Home Loan Experts points out, people often take on other debts such as a car loan or credit card after they buy a home and then this gets them into financial trouble.
If you find yourself in mortgage stress there are several things you can do. Most importantly, keep the lines of communication open with your lender. It is very hard to negotiate a repayment arrangement to save your home or even to get time to sell after the lender has obtained judgement.
The solution may be as simple as extending the term of your contract and reducing repayments. Just be aware, though, that if your lender does not believe this will help your situation then they do not have to agree to the arrangement.
Other ways to get your mortgage under control include:
Ensure you’re on the best deal. According to Canstar’s database, the cheapest standard variable rate is sitting at 3.39%. When comparing this against the average standard variable rate of the big four banks (5.27%) that’s a difference of $528 a month in repayments on a $500,000 mortgage.
Move out or sell up. By renting out your home and living somewhere cheaper you may be able to manage your repayments. Selling is a hard decision but it’s better to do it yourself rather than have the lender take over, as you’re more likely to get a better price and avoid legal costs.
Apply to your lender for a hardship variation. This usually comes in the form of frozen repayments, frozen interest rates and or partial repayments. It is important to note that interest is still added your mortgage
Access your super. You may be able to dip into your super on compassionate grounds. The most you can get from one fund in 12 months is three months of repayments and 12 months of interest on the balance of the loan. Release is given only if your lender is threatening to sell your home and you can’t pay the arrears any other way.
Obtain a mortgage relief loan. Governments provide assistance to eligible low-income families so they can buy and maintain their homes. In Queensland, for example, you can borrow up to $20,000 interest free. Not all states and territories offer this and eligibility requirements differ widely.