Mortgage stress is on the rise, but how can you overcome it?
Concerns about soaring house prices have come from the big banks, the RBA, Treasurer Josh Frydenberg and even the IMF! And it comes as the nation’s leading mortgage stress watcher says pressure from home buyers is skyrocketing.
There are rumors that the Australian Prudential Regulation Authority (APRA) is going to strike in the coming months and that it is ready to tell banks to make a Little Brittany and have their loan appraisal models in place so that the lender tells potential borrowers, “The computer says no! “
Home prices in Sydney have increased by over 30% in two years, but that’s an average, with some suburbs increasing by 40% or more!
A house in the bourgeois suburb of Haberfield recently sold for $ 7 million, $ 2 million more than the reserve!
And while all of those sparkling prices are great news for homeowners, potential buyers are shut out of the property. And those who have over-borrowed ultimately pose a problem, not just for themselves but for the economy.
Martin North of Digital Finance Analytics also states that if interest rates rise by half a percent, 223,718 households will face mortgage stress, which means the total number of households in a mortgage pressure cooker is 1.782 million!
Much of this comes from over-indebtedness. It is defined as someone who borrows more than five times their income. DFA calculates that 51% (or 788,000) of households have done just that, which is the cause of the huge spike in house prices.
Historically, interest rate hikes have preceded a stock market crash and recession, but it usually takes a lot of rate hikes to scare consumers and businesses into a spending strike that causes the economy to collapse.
In summary, the government and financial system regulators not only have an economic reason to be concerned about soaring house prices, but there is also a social and household financial problem associated with this growing mortgage stress.
It is therefore to be expected that some or all of these restrictions on APRA borrowers will soon be:
1. They could put limits on the amount homebuyers can borrow from banks.
2. They could make loans to investors more difficult to obtain.
3. There should be a crackdown on low deposit loans.
4. And they will force lenders to have more intrusive reviews on a borrower’s spending.
5. Also, they will force lenders to increase the interest rate service cushion, which means if you borrow at 3%, the bank will test if you can easily make repayments at 5% or 6%. And if you can’t, then “Computer says no”.
Fortunately, first-time homebuyers are likely to be spared much of this expected loan crackdown, but most borrowers in 2022 should expect brutal treatment from lenders as APRA scares them.
Back on mortgage stress, and over-indebtedness is often the source of it and this is likely to happen if someone borrows more than five times their income.
Sydney’s eastern suburbs, Clovelly, Maroubra and Randwick, are among the highest indebted households according to Digital Finance Analytics. And AFR’s Nila Sweeney reports: “In postal codes 2031 and 2035, where Clovelly, Clovelly West, Randwick and Maroubra are located, more than eight in 10 households on average have borrowed more than five times their income.
DFA says there are 446 postcodes in Sydney and 423 in Melbourne, all with high levels of mortgage stress.
So what can you do if this is you? Try these seven things to get started:
1. Evaluate how you would react if interest rates increased 0.5%, 1% and then 2%. I don’t see any significant increases until 2023 at the earliest, but I could be wrong.
2. Go to a mortgage broker and make sure you get the lowest possible interest rate.
3. Lock in a long-term, fixed-rate home loan if you think your potential cash flow problems are more likely to be short-term than long-term.
4. Set a budget and try to save substantial amounts of money, for example by charging GST on your life and imposing a 10% tax on your expenses. Then bank that against your home loan to build a reserve in case interest rates rise earlier than we think. (The RBA says the first rate hike won’t happen until 2024, but if the economy grows quickly, it could rise in late 2022 or 2023.)
5. You could sell your house in a strong market and trade or even bet on renting it out for a few years with the expectation that house prices will start to drop in 2023 or even sooner. It’s a big bet, but if you’ve made a big tax-free capital gain, it could turn out to be a winning plan over time. But, like I said, it’s a gamble.
6. Could you convert a garage into a grandma’s apartment for additional income that will help you pay for any future increases in interest rates?
7. Find a second job or start a side business to increase your income. Ultimately, you need to be able to deal with rising interest rates and the possibility that you may have bought at the top of the market. Over time you should see a good capital gain but it may take 10 years so you should be able to repay this loan. Getting your head in the sand with home loans when interest rates go up can put you in a real butt kick!