Keep calm and pay it down
There are Australians suffering from mortgage stress, but it’s not the crisis that some would have you believe
PANIC and scaremongering appeals to people’s innate fears and can cause incredible stress. It’s particularly dangerous when the scaremongering is not based on fact.
A classic case in point was last week’s episode of the ABCTV Four Corners program which dealt with the issue of the supposedly burgeoning number of people under mortgage stress which will cause an inevitable crash in the housing market.
The claims in the program just don’t match the facts and the assumptions of an impending crisis are just not realistic.
Before we get into the facts, there are a couple of points which need to be made;
There will always be people under mortgage stress no matter the overall economic or financial climate. That’s because debt is always a personal responsibility and there will always be people who, stupidly, decide to borrow more than they can afford. But those individual cases may not be representative of the general state of borrowers.
.● Every market moves in a cycle. There will always be peaks and troughs. The secret is understanding where you are in the cycle and planning accordingly.
Interest rates will inevitably rise from these record lows. The current signals from the Reserve Bank are that the first move up won’t be until next year and when it does happen it will be slow and incremental.
So what is the reality, the facts, surrounding the financial health of Australian home loan borrowers?
THEY’VE NEVER BEEN RICHER
Yes, debt levels are high but so are the levels of wealth underpinning that debt. Figures from the Australian Bureau of Statistics and the Reserve Bank show household debt (mainly mortgages) is at a record level equivalent to 180 per cent of annual household disposable income.
In other words, it’s worth about two years after tax salary.
Against this, the net wealth of Australians is worth 700 per cent of after tax income or about seven years of salary.
So that high level of debt is covered by three times that amount of assets. Now an argument can be made that if house prices crash the value of those assets will fall as well.
However, three times cover is regarded as very solid and conservative.
THEY ARE WAY AHEAD ON THEIR REPAYMENTS Over 20 per cent of home loan borrowers are more than four years ahead in their repayments and 37 per cent are more than a year ahead of their schedule. Less than 1 per cent of borrowers are a month or more in arrears.
History shows Australians Illustration: JOHN TIEDEMANN
are highly focused on paying off their mortgage and it has been this way for decades. In fact, average Aussies are among the lowest risk home loan borrowers in the world.
REPAYMENTS ARE NOT HIGHER THAN AVERAGE
We often hear about how high loan repayments are for today’s first home borrowers compared with previous generations. The facts are … they’re not.
The current repayments on new home loans as a percentage of disposable household income is around 24 per cent … that’s below the 10 year average of 26 per cent but around the average for the last 35 years.
So today’s young adults are making the same home loan repayments (as a percentage of household disposable income) as their parents were making. THE NUMBER IN ACTUAL “STRESS” ARE AT NEAR RECORD LOWS
According to the Reserve Bank and the Australian Prudential Regulation Authority, (APRA), mortgage stress remains at alltime lows and equivalent of less than 0.5 per cent of all loans.
The banks call these stressed loans “non-performing assets”. Of the loans in this category, business loans and personal loans have the biggest number.
As you can see the facts around the home loan market is that there is no need to panic.
Look, we’re not unsympathetic to today’s home loan borrower.
There is absolutely no doubt that it is tough to get into the property market and the level of debt involved is hair raising compared with any other commitment you’ve ever made.
Sacrifices have to be made and often you may not be able to afford the home of your dreams just yet. But they’ve been dilemmas of first home buyers for decades.
Where it’s different from the past is that we’re at the very bottom of the interest rate cycle and they will go up from here. By how much is anyone’s guess but it’s important to build that buffer now and to understand the consequences.
When we talk to people about a possible 2 per cent rise in rates over an extended period of time as the cycle swings up, the response is often “oh, that doesn’t seem too much”.
It’s deceptive.
Add 2 per cent to a 4 per cent current home loan rate and it becomes a 20 per cent increase in repayments … eek.
Bottom line … keep the mortgage under control and build that buffer.