New research shows mortgage stress has soared due to the COVID-19-induced recession.
Digital Finance Analytics (DFA) found to the end of May, the percentage of households in mortgage stress reached 37.5%, equal to 1.42 million households.
In addition, almost 100,000 households could default on their loan when the JobKeeper scheme comes to an end in September.
DFA founder Martin North said households are considered “stressed” when their income doesn’t cover their ongoing costs.
"The mix of households in stress is changing, as a larger number of affluent households are finding their finances are under pressure," Dr North said.
"Indeed, whilst many battlers are under pressure, they are used to it, but more affluent households are experiencing financial pressures as incomes have dropped."
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Product Features Monthly repayments:
$1,476 Advertised Comparison Product Features Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) owner-occupied 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. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
Smart Booster Home Loan
Monthly repayments: $1,476
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) owner-occupied 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. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
He said while JobKeeper had been a saving grace for many, other income streams hadn't been supplemented, causing stress.
"They are also exposed to property investments which are not performing, higher vacancy rates and the like; and in some cases, reduced hours too,"
"Typically, it can take two to three years for stressed households to either sell up on their own volition, or get foreclosed, so we expect higher default ahead given unemployment will be under 7% by the end of next year."
Dr North said tenants were also feeling the pinch, with rental stress rising and consequently putting pressure on investors.
"Around 12% of investors are indicating they may consider selling in the next year, and around half have been using Airbnb to let their places, which is now not possible."
He added younger families were most affected by mortgage stress, with the rise in stress not wholly confined to metropolitan areas.
"The highest proportions are in Tasmania. Households with low incomes and strong rises in prices," he said.
"And young growing families, including first-time buyers are most exposed."
CommBank and Westpac recently announced they would be offering temporary switches to interest-only repayments for borrowers on principal and interest payments, as part of their COVID-19 financial hardship support measures.
Dr North said he was worried about borrowers who took up such offers, as they would suffer in the long run.
"I am not sure switching to interest-only loans is a smart move as capital still has to be repaid at some point," he said.
Household debt and high unemployment Australia's 'Achilles heel'
AMP Capital chief economist Shane Oliver said record-low mortgage rates were keeping the property market functioning for now.
"This is keeping mortgage debt interest costs as a share of household income well below historic highs even though the ratio of household debt to income is at a record high of around 200%, Mr Oliver said.
"Low mortgage costs also make the funding costs for an investment property very low."
Mr Oliver said JobKeeper was the only thing stopping a complete collapse in the property market.
"Government support measures have provided a huge boost to household income, supported businesses, supported employment for around 3.5 million workers, prevented a confidence zapping surge in measured unemployment and with bank mortgage payment holidays are preventing a sharp rise in mortgage delinquencies and hence forced sales," he said.
But Mr Oliver said the combination of high unemployment and high household debt was Australia's "Achilles heel", and turning JobKeeper and other stimulus measures off could be disastrous.
"But once the support measures end later this year, measured unemployment will likely rise to around 8% and take a long time to fall back to the pre coronavirus levels around 5.2%," he said.
"This in turn is likely to lead to some increase in mortgage defaults as bank payment holidays (for around 440,000 mortgages) end, boosting forced sales and act as a drag on property demand, albeit it’s unlikely to be anywhere near what would have occurred in the absence of support measures through the shutdown."
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 2020. 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 2020) 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, Performance Drive 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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