Mortgage stress and loan repayment arrears are becoming a growing reality for Australian Homeowners in New South Wales, Victoria & Queensland.
A growing number of mortgaged homeowners are feeling the pinch and mortgage payment arrears are rising to 2 percent in some areas of Australia. Whilst this is still tiny compared to what has happened in the US, it should be a red flag to the RBA when considering any further rate rises. In fact some are now believing that the next interest rate move could be lower.
What percentage of income creates mortgage stress?
All I know is that the old standard when we had many single income families in Australia, in the 1960's to the1970's that it was hard to get a mortgage without 20% deposit, and that 30% of your gross income on your mortgage was the limit you could go for.This had the effect of suppressing real estate values.
And don't forget that income tax was at higher rates than it is today, so meant the average family was always squeezed. The other thing that happened in that era was constant wage increases and that soon made mortgages easier to cope with. That is just not part of the landscape these days. Successive Governments have opted for tax cuts as a way of moderating inflation and improving cash-flows on a household level.
So wage increases are few and far between in this period, and much more gradual than in those days. The result is that people who swallowed more they can chew today, have to put up with many years of indigestion in what we call mortgage stress.Its not something that we get into and inflation takes us away from anymore. Its around a lot longer.
The other big change is real estate value increases. In the sixties and seventies we saw a lot of home value appreciation, but for the passed four years we have seen little by way of property price rises, and some areas we have seen house prices fall recently, and it can make the pain of mortgage stress a lot harder to cope with. When property values slide backwards, it can give you that sinking feeling, especially if you find yourself underwater, meaning that the debt is larger than the equity of the property.
The Reserve Bank of Australia Moves interest rates in Mysterious ways.
My view is that the RBA rate rise in November was one rate rise too many, and many on the RBA are beginning to see that this was the case. That's we are getting interest rate rise talk, without the action.Will we see a rate rise or a rate drop next time?
Earlier in the year my bank manager asked me if I wanted to re-fix my mortgage as it came out of a very attractive fixed rate. They thought they were doing me a favour. I told them no, because I could not see how a rate rise was possible. Well, my variable rate is still under where the fixed rate would have been set, and variable rates could go lower. Now some brave traders are betting on the next move in interest rates to be lower down in Australia. More about that below.The reasons Lower Interest rates may happen
There were plenty of reasons for this, and they all have resurfaced now because they never went away. They are weak house prices and housing demand, slow wage growth, low retail spending, a shift to saving over spending that is seeing savings rise. Also the Euro debt crisis is yet to be behind us, and the US could double dip into another recession.Currencies traders are starting to bet that Interest rates will fall in Australia.
Most economists say that one or two rate rise are possible later in the year. But some currency traders are now betting that the next rate movement by the RBA will be down, not up.So any homeowner trying to sell a home right now, any home buyer looking at buying a home soon, and any real estate agent or mortgage broker wanting more business would be praying that a rate drop will come to pass.
What will happen to homeowners if mortgage rates don't fall?
If interest rates don't go lower, but rise instead, borrowers with only average-size mortgages in Sydney and Melbourne will be on the verge of ''mortgage stress''. And homeowners with mortgages that are bigger than average could be in for a lean ride. The experts say that a household is under mortgage stress once home loan repayments take up more than 30 per cent of gross income, according to some. But they are talking about two income families. It would make more sense for people know what their maximum mortgage repayments should be as a percentage of their net incomes.Part of the problem here, is how much other debt are these people carrying, and how they are affected with other price increases. That includes petrol, electricity, gas and food. All are rising way faster than inflation and that has to be making it harder for all home buyers and mortgage holders to cope with mortgage payments.
Source: Mr Mortgage
