One in 4 Aussies in mortgage stress

Interest rates may be at all-time lows but the number of households in mortgage stress is rising sharply.

One in four (767,000) Australian households are currently experiencing mortgage stress with just over 30,000 in ‘severe’ stress, according to Digital Finance Analytics.

The mortgage stress figure for April marks a jump of almost 100,000 households compared to March.

Plush parts of town are not immune to the financial condition – inner city suburbs across Melbourne, Adelaide, Sydney and Brisbane and Morton are finding it hard to pay the mortgage alongside regional areas in NSW Central Coast, Hunter in NSW, Darling Downs and Mackay in Queensland, Ballarat (west) and Geelong in Victoria.

(Graph 1)

A portion of households in these postcodes are also at risk of defaulting on their mortgage. A total of 52,000 Australian households are at risk of defaulting in the next 12 months, the data shows.

Mortgage stress is generally defined as a household spending more than 30 per cent of pre-tax income on home loan repayments, although Digital Finance Analytics calculate it on real incomes, outgoings and mortgage repayments.

“It doesn’t take much to tip people over the edge,” said Digital Finance Analytics principal Martin North. And its only going to get worse, he predicts.

“It takes about 18 months to two years between people getting into financial difficulty and ultimately having to refinance or sell their property or do something to alleviate it dramatically.

“We’re in that transition period at the moment as rates rise… over the next 12 to 18 months my expectation is that we would see mortgage stress and defaults both on the up.”

The results are “not all that surprising”, considering that incomes are static or falling, mortgage rates are rising, and the cost of living remains “very significant” for many households, he added.

Mortgage stress is at its highest level since 2000 accompanied by a surge in household debt to incomes (Graph 1).

‘Don’t flog that bigger mortgage’

Mortgage brokers have a role to play for stressed households in terms of helping them find their way through the maze, says North.

That solution could be a restructure, a different type of loan. Brokers should remain conservative in their estimation of what households can afford, he warned. “So, don’t try and flog that bigger mortgage.

“Don’t encourage households to borrow as big as they can. That 2 to 3 per cent buffer is really important, and those spending and affordability calculations are really important.”