Is your mortgage payment too high? Here’s how to prevent housing stress.

Is your mortgage payment too high? A high mortgage can lead to housing stress. Here are some steps you can take to help you avoid further financial stress.

In 1984, the average full time employee made about $19,000 per year, and the average home cost less than $150,000. Today the average income is about $73,000 per year. But the average cost of a home has ballooned to over $520,000. In fact, since 2005, the cost of housing has risen by an incredible 90%* while average weekly earnings have only risen by 65%* over the same period. And at the end of 2019, the house price-to-income ratio in Australia was 106%.

That’s a lot of data to take on board. But what it means is that most mortgage holders are carrying an incredibly high level of debt (195%* of income on average) and with interest rates at their absolute lowest, new borrowers are finding themselves locked into those borrowing costs with little to no flexibility in their interest rates over the life of the loan. This can cause financial stress where borrowers have maxed out their borrowing capacity at a low rate, but when the interest rate rises, will struggle to meet the new payment demands.

Relatively high levels of housing debt combined with predicted low wage growth, means borrowers don’t have the same opportunity to lower their debt over time in comparison to their income as they may have 10 to 15 years ago. And that can lead to a situation where your mortgage payment is just too high, leading to housing stress.

Housing Stress

Housing stress is simply a situation where the cost of housing is high relative to income for a particular individual. While that’s the definition, what it means for borrowers and families is that financial stress is likely to follow. It’s important to note that concern about levels of housing affordability is not about whether house prices are going up per se but rather the changes in the relationship between housing costs and household incomes.

In other words, housing costs are going up, but wages are not. And so more of our wages are going to pay for our housing. And the impacts of COVID-19, such as income disruption, will only exacerbate this problem.

Managing Housing Stress

In most cases, the effects of housing stress can be managed by being prepared, being cautious and taking a few steps to protect yourself. While interest rates remain low, it’s a good time to take those all-important steps.

Investors 

Investors should take this opportunity to review their property portfolio and seek advice from a property professional. Professionals will be able to access data and predictions that will help them (and you) understand the best long term strategy for you and your properties.

If you decide that the best strategy is to hold on to your investment property for the foreseeable future, consider moving to a fixed rate loan. These loan types are very competitive at the moment and give you the option to lock in the lower rate for a set period of time.

You could also consider converting your investment property loans to interest only. Interest only loans will both reduce your monthly commitment and create a situation where your repayment will be fully tax deductible. Many investors will already have structured their loans this way, but if you haven’t, I’d certainly recommend that you consider doing so. In this current environment it also gives you the opportunity to progressively build up a three-months buffer to cater for any future vacancy periods.

New purchasers

As a new borrower, it’s not unusual for your loan repayments to be less than your previous rent commitment. You can combat housing stress by allocating the difference in rent and mortgage to either a 100% offset account or directly to the loan itself. This will help you get ahead with your repayments quickly and without feeling the financial pinch.

In addition, you should consider increasing your repayment amount by 2.5% each year. This is a goal that is more easily incorporated into your day-to-day financial situation and that will help you keep ahead of any future interest rate rises.

For all borrowers

For all borrowers, whether investors, first time home buyers, expats or borrowers with a mortgage nearing its end life, this is a great time to review where you’re spending your money.

As a nation, we aren’t spending as much as pre-pandemic. We aren’t going out as often or paying as much for external activities. People aren’t shopping for non-essentials and we aren’t travelling to the same extent. The money saved from those activities can be put aside into an online saver account (one without a debit card). This will help you progressively build up to a healthy three-months buffer.

In terms of larger purchases, be purposeful in your spending. Rather than rushing out and buying something you ‘need’ on a credit card, think about what you would like to purchase. Evaluate whether you really need it or not. Then set yourself a plan and start saving towards the goal.

Saving a financial buffer, and spending within your means, will both go a long way to protecting you against housing stress.

Takeaway

If you’re asking yourself, ‘is my mortgage payment too high’, take the steps laid out here. They’ll help you avoid further financial stress, even during these unprecedented times. So, you’ll be able to enjoy your home without worry.

We’d love to help you navigate the current environment and find the right financing for you. Get in touch.

*Research from ANZ Research, Australian Economic Insight, 29 June 2020

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