- Close to half of all Australians (45%) with home loans are worried about being under mortgage stress
- Mortgage stress is degine as a houseold spending more than 30% of pre-tax income on home loan repyaments
- Lloyd Edge of Aus Property Professionals has provided three strategies to minimise the risk of mortgage stress
Following the decision last week by the Reserve Bank of Australia (RBA) to increase the cash rate by 25 basis points to 2.60%, the sixth consecutive rise, new research commissioned by Aus Property Professionals has found that close to half (45%) of all Australians with home loans are worried about being under mortgage stress.
For some Australians, interest repayments have doubled or even tripled compared to the same time last year, with a fiscal cliff expected over the next year as two-year fixed rates from the record low levels during the pandemic end.
What is mortgage stress?
Mortgage stress is defined as a household that is spending more than 30% of its income on its home loan repayments, making it difficult to pay bills and afford essential items.
A recent survey has suggested that about 28% of homeowners worried about mortgage stress borrowed too close to their maximum capacity. 25% noted they’d lost their job or suffered income loss, while 47% said that having kids.
78% added they are concerned about the impact of mortgage stress on their mental health.
“I’m very worried about my fixed rate maturing next year, thanks to the massive increase in interest rates. People like me didn’t cause inflation; however, it feels like the system is punishing us for it,” one survey respondent said anonymously.
Lloyd Edge of Aus Property Professionals said it is highly concerning that a large percentage of Australian households are worried about being under mortgage stress.
“I always advise that people buy property under their maximum borrowing capacity, to provide a buffer in case interest rates go up or their financial circumstances change,” he said.
“You never know what the future holds, however if you leave yourself a buffer you’ve mitigated the risk of mortgage stress and will likely be able to comfortably afford your repayments regardless of interest rate hikes.”
Lloyd Edge, Aus Property Professionals
On a more optimistic tone, 55% of homeowners with mortgages said they feel comfortable with their repayments.
Top strategies to mitigate mortgage stress
- Avoid overpaying
- Try rentvesting
- Look for cash-flow positive properties
In light of this, Mr Edge has provided three tips for a potential home buyer or property investor who wishes to mitigate the risk of mortgage stress occurring.
Avoid overpaying
Whether you are seeking a home to live in, or an investment property, it is vital to avoid overpaying for a property, regardless of your emotions.
“When the market is hot, many buyers get FOMO (fear of missing out) and make an emotional decision which leads them to purchasing a property for a price above its actual market value,” said Mr Edge.
“When this happens, you’re more likely to be borrowing at your maximum capacity and burdened with a larger mortgage than you originally anticipated.
“Furthermore, if your financial circumstances change and you need to sell your home, you wouldn’t be able to recoup all your money as you would most likely sell for less than what you bought it for.”
Try rentvesting
For those interested in owning property, but don’t want the liability of paying a mortgage on their own home, Mr Edge believes rentvesting is a great option.
“Rentvesting is where you rent where you want to live, while buying investment properties where it makes the most financial sense to invest based on price point, rental yields, and potential for capital growth.
“With rentvesting, your tenant is helping you pay your mortgage, and you can claim the interest on the loan as a tax deduction. Keep in mind that any interest you pay on a mortgage on your own PPOR (principal place of residence) can’t be claimed as a tax deduction.”
Look for cash-flow positive properties
A great way to mitigate against the risk of rising interest rates, Mr Edge said, is to buy positive cash-flow assets.
“The extra cash-flow provides a buffer, ensuring that you’re not paying out of your own pocket if your repayments go up,” he said.
Mr Edge noted that these properties have great rental yield – often five to seven per cent – and are often found in regional areas.
“There are many regional areas that are supported by a variety of industries and economic drivers and are therefore still good locations to invest in,” he explained.
Mr Edge acknowledged that it is difficult to get into the current property market., especially with high levels of inflation.
“However, by thinking outside of the box and implementing the right strategies it’s still possible for people to build wealth through property and achieve their goals,” he concluded.
