First Home Buyers in Mortgage Distress

By Kristie Kwok on 5 Dec 2013
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Despite low lending rates, 53 per cent of first home owners are said to be in mortgage distress. 

This alarming statistic comes from a First Homeowner survey conducted by Mortgage Choice in September, in which a thousand respondents took part.

Although the survey only includes first home buyers who purchased their home within the last two years, the results raise questions about lending standards generally and the serviceability of mortgage repayments when interest rates eventually rise.

What is Mortgage Stress?

In Australia, mortgage stress occurs when home owners contribute more than 30 per cent of their gross income towards mortgage repayments.  Experts believe that beyond this 30 per cent threshold, housing may be considered unaffordable. 

Mortgage payment as a proportion of income is only one of the numerous measures of affordability, but it is widely used and forms the basis of many industry reports. In terms of how it is calculated, often only major costs of ownership such as house prices and mortgage repayments are considered. 

Measure of Affordability as Lending Criteria

The 30 per cent threshold is also frequently used to assess mortgage credit applications and to determine borrowing limits. 

Given the Mortgage Choice survey looks at relatively recent purchases, its results seem to suggest that either income levels have fallen dramatically or lending standards have been relaxed.

“In Australia, mortgage stress occurs when home owners contribute more than 30 per cent of their gross income towards mortgage repayments.”

Indeed, speculation of late suggests that package discounts, cash rebates and increased broker commissions offered by banks to compete for home loan customers are lowering lending standards.

Although the major banks deny any wrongdoing, the fact is that risky credit products such as high loan-to-valuation ratio (LVR) mortgages are also back in the market. Some mortgage lenders are offering loans of up to 100 per cent with Lenders Mortgage Insurance (LMI).

The RBA has already publicly warned banks to lend prudently during their monthly board meeting in September.

What Will Happen When Interest Rates Rise?

Global ratings agency Fitch also voiced concerns over the serviceability of home loan repayments when interest rates do go back up.

“Standard variable rates (SVRs) have been as high as 9.6 per cent as recently as September 2008.  For example, monthly loan payments would rise to $2,544 from $1,820 for a home loan of $300,000 should rates return to recent SVR highs,” Fitch Ratings’ analysts said.

“…either income levels have fallen dramatically or lending standards have been relaxed.”

Considering the median house price in Melbourne is currently $538,000 (according to RP Data’s October figures) and interest rates appear to be on the rise, borrowers should expect higher mortgage repayments.

Combining a forecast of rising unemployment next year with the inevitability of an interest rate increase, banks are certainly being relied upon to lend responsibly now to avert future disaster.

But Isn’t Affordability on the Rise?

Although studies such as the HIA-CBA housing affordability report continue to cite growing affordability, the fact is that these improvements are mostly driven by reduced lending rates rather than structural shifts. 

First home buyers need to regard affordability measures or indices with caution, as levels of affordability stated reflect only what is experienced today and not what you can expect throughout the life of your mortgage.

For anyone experiencing mortgage stress or financial difficulties, it is important to speak to your lender or a mortgage broker who can assess your financial situation to find a suitable solution.

About the Author

Kristie Kwok is a Street News writer and a fully qualified chartered accountant with a Bachelor of Accounting and Finance degree. Kristie has a passion for all aspects related to property. She also has a strong interest in the economy and financial markets. Kristie has worked for reputable corporates such as KPMG UK, UBS, Lloyds Banking Group and the Royal Bank of Scotland.

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