Record mortgage stress ahead of rate cut

[Alex P Keaton]

This is quite an interesting article.
Record mortgage stress ahead of rate cut


*Exerpt*

On average, families across Australia are paying 38.9 percent of their income in mortgage repayments. Those paying more than 30 percent of their income are considered to be in mortgage stress.



"The situation is most severe in New South Wales and Queensland, where the proportion of income required to meet loan repayments increased to 42.6 percent and 41.0 percent respectively"


How do people sleep at night when they are paying nearly half their wages for just the roof over their heads Why on earth would you put yourself under that much pressure!!

 

[troyhunt]

How do people sleep at night when they are paying nearly half their wages for just the roof over their heads. Why on earth would you put yourself under that much pressure!!

Probably partly because many people got themselves into this situation when interest rates were 6.5% and they've not had the financial competence to foresee the inevitable rises. We're now looking at interest payments up to 50% higher than this.

I also wonder how many people leveraged "equity mate" when the rates were lower and are now struggling with it. And there's the old fear of missing out and jumping on the bandwagon before it's "too late". Oh, and don't forget the fear of missing out on the "Great Australian Dream" (now available at up to 42.6% of your income)!

 

[Aaron Sice]

i earn good money, and i pay nearly 45% of my wage on my mortgage.

that said, the 55% that is left over is about the same amount as 80% of the average wage - so i'm just using it more as forced investing.

i paid good money for a top location to build a great house as an investment that will hopefull be "recession proof". it's an area popular with 12month contract workers from OS, rent covers mortgage, so it's really a win-win situation - except for the cashflow bit.

 

[Alex P Keaton]

Probably partly because many people got themselves into this situation when interest rates were 6.5% and they've not had the financial competence to foresee the inevitable rises. We're now looking at interest payments up to 50% higher than this.

I've been wandering about something. When I have calculated my repayments I have factored in a 10% interest rate just to make sure I can afford such a loan. But now I'm wandering. Do you think that interest rates will ever go up now in the next five years. I can only see them going down from here. Thats what they are saying. I have heard though its important to have a 2-3% interest rate buffer so that you can afford the repayments if the IR goes up. I think the smart thing to do would be to make sure you can afford the 10% IR and then if the rates go down save the remainder. Use it for expenses and also to help save for next ip purchase.

 

[mooby]

I spend more the 30% of my income on my mortgage and I wouldn't say I'm under any stress. I guess it depends on the rest of your financial commitments. If you have no kids, no car loans, no other debt.. I don't see a problem.

 

[letiha]

It what they spend the other 70% on that normally causes the stress - extra cars, extra luxury furniture and gadgets, clothes all on credit cards and interest free.

 

[troyhunt]

Do you think that interest rates will ever go up now in the next five years.

I think that rather than speculating on what the rates might do you need to be planning for the rises so you insure yourself against what you might perceive as an unlikely move. I expect they'll move down over the next year but I'm prepared for them to move up significantly. Having aid that, history has shown that we tend to have a series of falls before they go up again: http://www.rba.gov.au/Statistics/cashrate_target.html

One sidenote; IPs obviously suffer far less from the rises given the interest is deductible and rising rates tend to coincide with rising rents.

 

[Alex P Keaton]

I spend more the 30% of my income on my mortgage and I wouldn't say I'm under any stress. I guess it depends on the rest of your financial commitments. If you have no kids, no car loans, no other debt.. I don't see a problem.

what i meant to say was.... i think the ones who are really up s*** creek are those peeps who just have a ppor mortgage (regular joe shmloe) with no money behind them, rather than peeps who have assets and investments behind them as well as paying over 30% mortgage amount.


Yeah I agree about the kids thing. Even though I'm only on $42 K pa, atm im glad I dont have to support kids, their bl**** expensive.

 

[Alex P Keaton]

I think that rather than speculating on what the rates might do you need to be planning for the rises so you insure yourself against what you might perceive as an unlikely move. I expect they'll move down over the next year but I'm prepared for them to move up significantly. Having aid that, history has shown that we tend to have a series of falls before they go up again: http://www.rba.gov.au/Statistics/cashrate_target.html

One sidenote; IPs obviously suffer far less from the rises given the interest is deductible and rising rates tend to coincide with rising rents.

Yeah I'll just make sure I'm careful with my money. Keep a decent buffer.

 

[murtagh]

It has occurred to me that if I was a very smart cookie in charge of running the economy, and I knew that my entire populace was "over-leveraged" and putting over 30% of their income into debt repayment, that perhaps a smart move would be to cut rates despite strong economic growth and allow a few years of high inflation.

This would push wages up, which would inflate asset prices a little, and create a kind of forced de-leveraging of the populace.

An engineered soft landing from over-use of cheap credit - as long as inflation comes into line from external forces over time.

Or this armchair economist should stick to the day job

 

[Peter Parker]

It has occurred to me that if I was a very smart cookie in charge of running the economy, and I knew that my entire populace was "over-leveraged" and putting over 30% of their income into debt repayment, that perhaps a smart move would be to cut rates despite strong economic growth and allow a few years of high inflation.

This would push wages up, which would inflate asset prices a little, and create a kind of forced de-leveraging of the populace.

But if asset prices were on the way up, wouldn't that encourage people to think they'll keep going up, and for everyone to get rich by borrowing more? So we're back to where we started with even higher average LVRs!

Peter

 

[murtagh]

But if asset prices were on the way up, wouldn't that encourage people to think they'll keep going up, and for everyone to get rich by borrowing more? So we're back to where we started with even higher average LVRs!

I don't know that "most people" leverage for investing. They seem to do it for their own residences and that's about it. But I see your point, and it makes me very glad I'm not in charge of these things.

 

[J Martin]

This is quite an interesting article.
Record mortgage stress ahead of rate cut


*Exerpt*

On average, families across Australia are paying 38.9 percent of their income in mortgage repayments. Those paying more than 30 percent of their income are considered to be in mortgage stress.



"The situation is most severe in New South Wales and Queensland, where the proportion of income required to meet loan repayments increased to 42.6 percent and 41.0 percent respectively"


How do people sleep at night when they are paying nearly half their wages for just the roof over their heads Why on earth would you put yourself under that much pressure!!

People simply want security. Rental laws in this country do not provide this.
Longer term leases matched to CPI, as per european models would be a start.

As ironic as it sounds, mortgage stress is simply a consequence of the averages persons craving for security. Rightly or wrongly, the great Australian dream is still popular, and many will go to great lengths to achieve this, even though the premium over renting is high, and getting worse.

If house price growth continues to outstrip rent and wages growth, I personally can see a generation reassessing the need for "the dream", and simply renting.

 

[weg]

If house price growth continues to outstrip rent and wages growth, I personally can see a generation reassessing the need for "the dream", and simply renting.

A lot of homebuyers, especially FHB will need to reassess that dream..... but it doesn't mean the only option is renting. They just need to lower their expectations . The parents of many of these FHB didn't start off living anywhere near as comfortably as their children.

It's really about going back to basics, like going without for a while to save a deposit, living in an unfashionable suburb and buying a small home (3x1 and below median), or doing a reno perhaps and taking on a second job (like the good old days ) for FHB, and forgetting about the 4x2x2 McMansion or equivalent for other buyers when they can't really afford it.

I don't believe it's a case of easier said than done either. The last generation had to work hard and make sacrifices to buy a home as well, regardless of the much repeated, homes now cost ?? times income.

 

[J Martin]

A lot of homebuyers, especially FHB will need to reassess that dream..... but it doesn't mean the only option is renting. They just need to lower their expectations . The parents of many of these FHB didn't start off living anywhere near as comfortably as their children.

It's really about going back to basics, like going without for a while to save a deposit, living in an unfashionable suburb and buying a small home (3x1 and below median), or doing a reno perhaps and taking on a second job (like the good old days ) for FHB, and forgetting about the 4x2x2 McMansion or equivalent for other buyers when they can't really afford it.

I don't believe it's a case of easier said than done either. The last generation had to work hard and make sacrifices to buy a home as well, regardless of the much repeated, homes now cost ?? times income.

I personally think this whole Gen Y are buying the 4x2 first new house with the must have gadgets is a common misconception. I know dozens of 20something couples, most well educated, most buying modest 3x1's in average/below median suburbs. It still does'nt change the fact that they'd need 6x average income or more to buy these basic homes and it would cost about half as much to rent.

If house prices go up by 7%, and rents 4%, in 10 years the ownership cost v
renting ratio would be closer to 3 to 1.

 

[keithj]

A lot of homebuyers, especially FHB will need to reassess that dream..... but it doesn't mean the only option is renting. They just need to lower their expectations .

Agreed.... GenX/Y are accustomed to having a new plasma as good as their parentsplasma & a car with all the bells and whistles.... they appear to be fully expecting that to be extrapolated to a house as good as their parents with all the bells & whistles.....

 

[J Martin]

Agreed.... GenX/Y are accustomed to having a new plasma as good as their parentsplasma & a car with all the bells and whistles.... they appear to be fully expecting that to be extrapolated to a house as good as their parents with all the bells & whistles.....

I feel like a broken record on this. A plasma screen TV costs a bit more than an average weeks wage these days. This has nothing to do with expectations. It's simply cheap. Another humdinger is the Ipod, which costs anywhere from a 1/5 to half an average weeks wage. These are not the things that are stopping first homebuyers buying a house. Houses are expensive. Even dodgy ones.

 

[keithj]

If house prices go up by 7%, and rents 4%, in 10 years the ownership cost v renting ratio would be closer to 3 to 1.

There are a couple of other things that should be taken into consideration for the rent vs buy equation.....
What if IRs drop by 1.5%-2% ?
What if disposable income continues to increase at 6% pa (as it has for the last 20 yrs) - roughly in line with house prices incidentally ?
And rents increase by 10%pa for 3 yrs, because of lack of supply ?

 

[Aaron Sice]

If house prices go up by 7%, and rents 4%, in 10 years the ownership cost v
renting ratio would be closer to 3 to 1.

but then they'd have 7% capital growth - money they didn't have before - with all the tax benefits, instead of a bill for a roof over their head that has now grown 4% and nothing to show for it.

well, there could always be a new iPod and iBank to fit their new iCar they got with this great iFinance deal from their iBroker.

 

[weg]

I personally think this whole Gen Y are buying the 4x2 first new house with the must have gadgets is a common misconception. I know , most well educated, most buying modest 3x1's in average/below median suburbs. It still does'nt change the fact that they'd need 6x average income or more to buy these basic homes and it would cost about half as much to rent.

If house prices go up by 7%, and rents 4%, in 10 years the ownership cost v
renting ratio would be closer to 3 to 1.

Perhaps the dozens of 20 something couples you know have already reassessed 'the dream' and are doing what it takes to get into their own home. I've known some too, just not dozens. Good on them.

Others like my tenants probably couldn't afford to buy. They have a large plasma (I don't), many doodads and a car that's worth at least 5 times mine.

Statistically though a large percentage of people are buying bigger, better and more, both in consumer items and houses. It's proof is in company profit margins and consumer reports.

I also believe these consumers are from across the board.... renters, FHB and homeowners, with many using credit to buy non essential items and services (again statistics speak for themselves).