SYDNEY, Australia – Based on the study conducted by the Digital Finance Analytics (DFA), one in three household borrowers in Australia are experiencing mortgage stress.
According to the study, more than one million borrowing households in the country are suffering from mortgage stress amid Australia’s low interest-rate setting.
Mortgage stress has continued to plague one in three borrowing households. In addition to that, more than 50% of the young and growing families are exposed to the same stress as well. The DFA study expects defaults in the next 12 months to reach more than 83,400.
According to the principal of DFA, Martin North, the results shown by the study are not surprising at the very least. He said that with the ongoing increase in costs and the pressure on incomes, the result of the study was expected, despite the relatively lower mortgage rates given to some household borrowers.
With the three rate cuts imposed by the Reserve Bank of Australia (RBA) last year, would-be homebuyers were able to take leverage of much lower mortgage rates. The cash rate in Australia currently is at 0.75%, which is its lowest level ever since. Previously, market watchers are saying that further rate cuts by the central bank can be expected in 2020 as the country’s economy remains to underperform.
David Bassanese, a chief economist from the BetaShares Capital, previously hinted about the possibility that the central bank will go for another rate cut in the coming month. If it happens, the rate cut will be at 0.5%, which is another historic low. Another rate cut by the RBA after that will bring the cash rate to an unparalleled 0.25%.
Despite the lower home loan rates that started last year, mortgage stress has continued to become rampant in the country. North explained the main reason for this one, citing that a lot of the household borrowers have been unable to access what lower rates the banks are offering to their new customers. It has caused many existing household borrowers to get stuck in their original and much more pricey home loan rates.
North further stated that these household borrowers are not reducing the number of their debts. He said that in some cases, most households are turning towards getting additional financing to try to bridge the gap in their cash flows. In some other cases, North said, borrowers are raiding what is left of their savings, if they have any, and using their credit cards to shoulder more of their finances.
From the survey done, mortgage stress is defined and considered as is if a particular household has much higher expenses, which includes their mortgage repayments, compared to their overall income.
North explained that mortgage stress is not defined using a set proportion of the amount of income of a particular household that is used to pay for their mortgage. He stated that borrowers might have some other assets that they could sell, but in terms of the cash-flow currently, they are considered underwater.
The latest poll from the DFA shows that an additional 70,000 households suffered mortgage stress in October last year. The current addition has pushed the total number of households under mortgage stress to over 1.7 million, which is around 3.2% of the total population in Australia.
However, the recent figures show that the highest number of household borrowers experiencing mortgage stress is in Tasmania. They cover around 36.9% of the total number of Australian households struggling with repaying their home loans, which is equivalent to around 31,700 borrowers. It was then followed by the Northern Territory, which covers around 36.7% of the total number of mortgage-stressed borrowers.
However, the total combined number of stressed household borrowers in Tasmania and Northern Territory is much lower compared to the recorded households in the difficulty of repaying their home loans, which is at 300,000. It is equivalent to around 28.3% of the total households in the state.
For the defaults, three in five borrowers are under mortgage stress in Western Australia and Victoria.
Western Australia has reported the biggest rate within the region, which is at 4.2%, which is way beyond the national average rate of 2.2%. Meanwhile, the number of household borrowers in the state that are experiencing mortgage stress is at 33.6%. It is equivalent to around 152,000 borrowers.
Based on the household segments, over 50% of young and growing families or 166,000 young and growing households were in mortgage stress. Based on the report, nearly 50% of the total number of households living in fringe areas and urban regions are reported experiencing the same home loan stress.
North explained that the drought had been a huge factor in the increased pressure in rural households. Around 25.6% of the population was recorded to be under mortgage stress, which is equivalent to around 78,500 households. Furthermore, North cited that exclusive professionals, which are the more affluent household segment, wasn’t free from mortgage stress. Around 24% of the population in this segment was reported to be under stress, which can be equated to around 54,600 households.
In other words, according to North, mortgage stress is a problem that has affected every household sector within society.
North even stated that the highly developed and fast-growing suburbs in the borders of a lot of major centers recorded the highest number of households under stress. According to him, there are many newly built properties and little infrastructure on small lots in these areas, which is a critical cause of the stress.
North explained that as a result, a substantial part of the income from households in these areas goes into transportation costs. With that much high expenses and the biggest mortgages, even those households that have steady and above-average incomes are constantly under serious pressure, North said.
As a key takeaway, North advised that those households who are experiencing mortgages stress must take action and become more aware of their standing financially. He stated that household borrowers need to start mapping out their entire cash flows and shift more of their focus into repaying their debts with the highest interest rates first.
Furthermore, he advised borrowers to steer clear of restructuring and refinancing schemes. According to him, these methods can provide relief to borrowers in the short term only. North said that there would be no long-term fix to mortgage stress unless household borrowers will start changing their financial behavior.