Extent of mortgage stress revealed

Some spending more than 70% of income on home loan payments

Extent of mortgage stress revealed


By Ryan Johnson

A new report from retail mortgage broking giant Aussie supports the observations of a senior broker that homeowners are facing ongoing challenges due to increasing rates and a cost-of-living crisis.

Rod Peirce (pictured above left), a senior broker with Aussie Home Loans, part of Lendi Group, said he was receiving multiple phone calls and enquiries every day “purely about mortgage stress and rapid rate rises”.

“It’s getting real. It’s really caught a lot of people off guard,” said Peirce, who is also the founder of property advisory company Lending Options Australia.

“People have to accept that the surplus cash flow that was one available once available is no longer and, in some cases, they find themselves in deficits. Understanding stress and what it looks like for the individual client is something that we as brokers talk about every day.”

The comments come after research commissioned by Aussie found almost 23% of homebuyers are using more than half of their income to pay their mortgage, while a staggering 11% are using more than 70% of their total income to pay their monthly home loan.

The 12th Rate Rise Effect Report surveyed 1,000 Australian homeowners and found that rising rates have left households facing significant financial hardship, with 29% of respondents struggling to make their higher repayments and 13% worried they could default on their loan.

Notably, one in four borrowers say the rising rates have left their long-term financial security at risk.

Lendi Group co-founder and Aussie chief operating officer Sebastian Watkins (pictured above right) said the report was “highly concerning” for both the financial and mental health of households as they gave up financial strategies previously put in place, while picking up second jobs and working longer hours.

“We’re seeing households contribute less to super and savings which means right now, mortgage holders are sacrificing their long-term security to pay their mortgage,  it’s worrying the impact this could have on the economy, as homeownership should provide that simply that – financial security and stability,” said Watkins.

“A sizeable portion of Australian homeowners are being forced to make difficult life alterations to afford their higher mortgage repayments.”

The report revealed 37% of homeowners are having to work longer hours or overtime because of the rate increases, while 22% have taken on a second job. More than 10% have sold longer-term investments, 55% have cut back on holidays and 60% have reduced their grocery spend.

The data revealed that 50% of respondents said they had stopped or reduced their contributions to savings, while a further 19% had stopped or reduced their superannuation contributions.

Peirce said he was having these types of discussions with clients as recent as Saturday morning.

“They’ve got their owner-occupied and an investment property and their interest costs are going up about $2,000 per month. They both just looked at each other and said ‘how on earth are we going to manage that?’ That’s the reality of it all,” Peirce said.

More pain ahead

With 12 rate hikes in 13 months, it’s been a while since mortgage holders have felt some relief.

While Peirce said the RBA was “nearing the end” of rate rises, there was still more pain ahead for borrowers due to a lag from the extraordinary circumstances during the pandemic.

“People were saving lots of money. Many had surplus cash flow because they weren’t spending. That took time to consume and there was a lag as rates started to jump up. But people were still consuming money as if they had it freely and not really understanding what was coming,” said Peirce.

“Now we are here in the middle of it, and the lag means there is more to come.”

Analysing wage and lifestyle costs of Lendi Group’s home loan applications during settlements, Watkins said the data revealed that further increases in the cash rate could lead to further stress.

“For example, two more rate rises resulting in rates being 6.25% would see 41.7% of fixed rated holders, who took out mortgages at the bottom of the rate cycle, hit a negative net monthly surplus,” Watkins said.

Currently a single homeowner on a $120,000 income, with a $600,000 mortgage, has experienced a monthly repayment increase of around $1300 a month since the rate rises, which accounts for an extra 13% of their monthly pay, leaving them allocating 42% of their income to their mortgage and around a $150 surplus each month.

With current loan serviceability levels, a couple with two young children earning the same amount, this increase would put them into negative monthly service, making them a mortgage prisoner.

Peirce agreed saying there was “certainly a cohort of borrowers” in mortgage prison.

“Even if they’ve had good conduct for two or three years without missing a beat, it doesn’t matter,” Peirce said. “They are in mortgage prison for the time being and can’t move.”

Refinancing out of mortgage stress

Mortgage stress is growing among Australian homebuyers.

When asked about their perceptions on refinancing in the current economic market, 48% of the report’s survey participants responded that they are doubtful it will save them much money, while 27% said they trust that their lender is giving them a good deal.

“This is worrying because in this higher rate market, borrowers need to be actively pursuing all avenues to alleviate their mortgage stress – particularly those first home buyers, who we know will really feel the pinch, after allocating so much of their savings to their first home,” Peirce said.

“74% told us they have not yet attempted to refinance, leaving seven in 10 homeowners open to revisiting their options.”

Peirce said that as brokers, “all we can do is work through it, talk to our clients, and provide options as early as possible.”

“I'm not a negative person – I’m the eternal optimist. We’ve just got to work through the current pain and urge our clients to take a long-term view,” Peirce said. “I'm a firm believer as long as we talk about what the issue is, then we can work through it.”

Are your customers experiencing mortgage stress? Have your say in the comments below.

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