Mortgage stress: Australia’s $295b mortgage time bomb

A $295 billion mortgage debt bomb could result in 900,00 Australians falling under mortgage stress within the next two-years.

New research by Finder.com.au42 percent of home loans taken out between 2014-2015 were interest-only loans.

“People are paying just the interest on their mortgage with the idea that the principal value is going to increase so they never really taking anything off the principal value,” Finder.com.au’s Insights Manager Graham Cooke told .

Digital Finance Analytics’ most recent data showed that 30.7 percent Australian households with a home owner loan are experiencing mortgage stress.

New South Wales and Victoria had the highest population, with more than 500,000 households each.

But those figures could rise, with the interest-only loans of almost five years ago reverting to “normal” principal and interest loans, forcing home loan repayments to increase.

Mortgage stress refers to households that cannot pay their mortgages.

“The industry generally defines mortgage stress as starting when a household spends 30 percent or more of their income on repayments,” Mr Cooke said.

Despite the fact that Australia has a historically low cash rate, it will eventually rise and mortgage repayments will follow suit.

“Families need to ensure they’re not over-extending themselves when taking out a mortgage.

“Mortgage holders should always factor in a buffer of 2-3 percent on top of their current rate. This ensures you can accommodate future rises without slipping into mortgage stress.”

Mortgage stress refers the fact that mortgage debt can make families feel stressed because they have less disposable income and must pay their monthly payments.

Mr Cooke suggests families look at their finances to avoid mortgage stress.

Julie, who lives in a small apartment in Melbourne, was told by her bank at the beginning of the year that she’d have to come off her interest-only loan and pay principal and interest.

The 64-year-old, who is unemployed and receives Centrelink welfare benefits, told she became concerned after seeing the amount she’d have to pay on a principal and interest loan.

“The amount they told me I had to pay was actually more than my Centrelink income,” Julie told .

“They basically looked at me and said there’s nothing we can do.”

After many phone calls and meetings, Julie reached an agreement to her bank.

Fortunately for Julie though, her bank seems to have mishandled her case and have continued sending her interest-only bills, meaning she hasn’t been paying the principal amount.

Although Julie raised the issue with her bank twice, she’s now awaiting the day they realise their mistake but remains fearful of the cash she’ll have to cough up every month.

“There’s a very good possibility [my financial adviser] would tell me to pay it out of my superannuation.”

Julie encourages home loan borrowers with bad mortgages to get on top of their lenders, despite the difficulties that she experienced with her bank.

“[Banks aren’t] proactive anymore so if you’re proactive and make suggestions to them, quite often it will work out to your advantage.

“Just work things out for yourself, don’t depend on the banks.”

Interest-only loans can be attractive at first but they can end up being costly.

“You’re paying less per month but you’re only paying the interest, you’re never touching the principal,” Mr Cooke said.

“If you’re in a market where prices are constantly going up then in five years, rather than going to principal and interest, you can just sell the house and then you keep the increase in value.

“But they make more sense in a healthy market than they do in a slowing down market which is what we’re seeing at the moment.”

The 900,000.00 interest-only mortgages will be converted to principal or interest and the household will feel the brunt.

“It’s going to cost the mortgage holders around $400 extra per month. That’s with current interest rates. If the mortgage rates go up, it’ll cost even more than that,” Mr Cooke said.

Rising electricity costs and other household essentials could make mortgage stress a common reality.

“It just happens to be coming at a time when some households are in a little bit of difficulty as inflation’s low and wages not really growing.”

Although mortgage holders have the option of rolling over to another interest only loan, Mr Cooke said it was unlikely they’ll be approved.

“Lending criteria are much more strict now so they’ll find it much more difficult to get a second loan, so they’re going to be forced to pay the higher rate.”

Mr Cooke added if the 900,000 interest-only loans were taken out with today’s regulations and restrictions, most of them would not be approved.