The buzz-term in real estate commentary recently seems to be “mortgage stress”. Hardly a week goes by when yet another report alerts readers to the alarming news that even more people are now apparently subject to mortgage stress.
But what does this term mean and how accurate is it at explaining the current situation of homebuyers?
The term ’mortgage stress’ become popular during last year’s federal election and should be seen in that context. It refers to those households, whether they be singles, couples or families paying more than 30 percent of income on a mortgage.
However, what careless property commentators using the term ’mortgage stress’ fail to explain, is that this experience is relative to a person’s income and financial choices. They don’t point out that this measure applies only to the lower two quintiles of income earners; in other words, those households in the lower 40 per cent of income distribution. Such commentators are ignoring the “30/40 Rule”, the accepted definition of housing stress outlined in the 1992 National Housing Strategy.
It’s also important to understand that the financial data in the Census being used by commentators on mortgage stress does not separate households which have refinanced their property after paying off loans. Many people have acquired considerable equity in their homes and then borrowed against this, often for further property investment. So, on paper it looks like they are servicing a large housing debt when in reality they are comfortably off.
Equally, the Census data does not separate those people who choose to make higher repayments to bring down their loan faster from those making minimum repayments. The Reserve Bank reports the majority of home buyers are at least one year ahead on repayments.
The reality is that once people have secured a loan with a bank or lender there are few things which can subsequently cause mortgage stress. Banks already build in a buffer to the loan repayments based on possible interest rate fluctuations. Outside of this, there are only three things that can trigger genuine mortgage stress. These include loss of employment, unexpected interest rate rises and marriage and family breakdown.
This is not to suggest that homes in WA are not more expensive than they once were or that mortgage repayments are not higher as well. However, employment is stronger and incomes are higher in our state than elsewhere. Defaulting on mortgages in WA is almost unheard of and there has recently been a surge in the numbers of first homebuyers.
Mortgages need never be stressful. The key is to do your homework with the bank, buy a house appropriate to your needs, borrow within your means and always seek competent financial advice before purchasing.
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