1.1 million households under mortgage stress: DFA

author-avatar By on January 10,2020
1.1 million households under mortgage stress: DFA

Photo by Zach Vessels on Unsplash

Falling home loan rates hasn't stopped the number of households experiencing mortgage stress from rising.

The Digital Finance Analytics (DFA) Mortgage Stress Trends Data to December 2019 found the number of households in mortgage stress - defined by DFA as when household cashflows are negative - rose to 32.7% of all borrowing households. 

The number for October was 32.2%

That 32.7% figure represents 1.1 million households across the country, with more than 83,000 households predicted to be in default, despite the lower cash rate and "deeply discounted mortgages". 

Stress trends

Source: DFA

"Stress is assessed in cash-flow terms, and when money in is not sufficient to cover the costs of the mortgage and other regular outgoings, the household is flagged as stressed," DFA principal Martin North.

"Granted they may have the capability to tap into deposits, pull down on credit cards, or even sell property, but on a regular basis they are in strife. We find a significant gap between those we assess as at risk, and those who believe they do have financial difficulty.

"Many adopt the head in the sand approach and hope things will improve, but given the current economic outlook, we think that is a courageous stance to take."

The graph above shows Australia's average debt-to-income ratio remains high at 186.5, although there has been a recent drop from 191.

The table below displays a selection of variable-rate home loans on offer, featuring a low-rate pick from each of the following three categories: the big four banks, the top 10 customer-owned banks, and the larger non-banks.

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
2.68% 2.74% $1,618 More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 18 May 2020. View disclaimer.

Mr North says he expects stress levels to continue to rise given current economic conditions.

"Households would do well to draw up a cash flow, to identify money in and money out, determine which spending is essential and prioritise accordingly," he said. 

"And remember, if you are in financial difficulty banks have an obligation to assist, so go talk to them, early. Avoid the head in the sand posture, as it leaves other parts horribly exposed."

He also said DFA would soon be releasing its household financial confidence (HFC) index, which highlights the challenging issues for households. 

The HFC index for October 2019 was at its lowest point ever of 83.7, with the increasing cost of living a concern for 91% of the 50,000 homeowners surveyed. 

Which states are the most stressed? 

New South Wales, Victoria and Queensland reportedly have the highest levels of stress in the country, which may have something to do with the fact these states have the most expensive median property values in the country, according to CoreLogic data. 

Victoria has a proportionally higher stress reading compared to New South Wales, however, with both of these states having just over 40% of households in mortgage stress. 

The Northern Territory, South Australia and Tasmania have some of the lowest levels of mortgage stress but the highest proportion of households in difficulty, while West Australia has the highest risk of default over the next 12 months at 4.2%. 

Stress by state

Source: DFA

Across the top postcodes, Toowoomba 4350 (48%), Liverpool 2170 (49%) and Fountain Gate 3805 (59%) have the highest portion of households in stress. 

Even bigger numbers can be seen when divided by regions. 

Central West Queensland has a mortgage stress rate of 75%, although this is only 300 households, while Alice Springs has a 65% stress rate with 2,000 households exposed.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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author-avatar
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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