Mortgage stress affecting 40% of households, despite property market aflush with stimulus

Billions of dollars’ worth of government and bank support has failed to put a lid on mortgage stress, soaring to its highest level ever.

Out of every 2.5 owner-occupied households, one is experiencing mortgage stress, Digital Finance Analytics’ (DFA) rolling survey of 52,000 households found.

That figure crept up by 1.1 percentage points to 40.2 per cent in the month to July, and is equivalent to more than 1.5 million households who live in their own home. 

Victoria had the highest number of owner-occupiers in mortgage stress, at about 430,000.

But it was NSW that saw the biggest jump in stressed households, with the mortgage stress rate increasing by 1.8 percentage points to 38 per cent. This was followed by Victoria and the ACT, seeing growths of 1.6 and 1.2 percentage points respectively.

Nationally, the proportion of owner-occupiers under financial pressure from their mortgages has risen from about one third in February 2020.

DFA uses cash flow to determine whether an owner-occupier is in mortgage stress. A household is considered to be in mortgage stress when their outgoing costs exceed their net income.

The research also suggested that 2.8 per cent of all borrowing households could be in risk of defaulting, up from 2.7 per cent in the month prior.

Martin North, DFA principal, said the pandemic and the ensuing lockdowns have added to the financial strain families are experiencing, despite stimulus measures from the government and banks.

“As a result of the economic slowdown, which was already underway before COVID, and exacerbated by the COVID restrictions, more households are falling into financial stress,” he said.

“In the round while the various government support schemes, and repayment holidays, plus rental freezes are assisting, the downward trajectory in finances is clear, and explains the rising stress.” 

Are property investors in mortgage stress?

About one quarter, or 832,000, of borrowing property investors are in mortgage stress. This is slightly down by 0.7 percentage points from the previous month.

However, the number of those in “severe stress”, about 128,000, was up by about 2,500 from June.

Twelve per cent of investors are “actively considering selling”.

Mr North noted there was a rise in tenants who are struggling with rent repayments, with almost 35 per cent of tenants in rental stress.

“There is confusion for some as to whether their rents are on hold, or simply accruing. We are seeing more households planning to move back with family and friends,” he said.

Melbourne CBD had the highest number of investors in mortgage stress, with some 4,300.

“We expect the banks to be tougher on property holders in these high-risk areas, compared to others as the discussions about payment restarts after September,” Mr North said.

Will more people fall into mortgage stress?

Mr North anticipated that more households could be pushed into mortgage stress when home loan repayment deferrals end.

“We expect this to climb higher as support is moderated, and banks have hard conversations about recommencing repayments.”

Eliza Owen, CoreLogic’s Australian head of research, said it was “reasonable to expect a sharp rise in mortgage arrears”, and that urgent property sales could be on the rise as government stimulus measures taper in October. 

“This is when we are likely to see a rise in the number of households facing financial distress and a lift in urgent sales.”

It’s possible that home loan borrowers can save money by refinancing to a lower interest rate. More than 40 per cent of those on mortgages are considering refinancing due to COVID-19 and low interest rates, a RateCity survey found.

The lowest ongoing variable rate on RateCity’s database comes from Easy Street Financial Services, with an advertised rate of 1.95 per cent and a comparison rate of 1.99 per cent.

If you suspect you may be falling into mortgage stress and haven’t already accessed hardship measures with your lender, check out RateCity’s Relief Hub to see which lenders are offering assistance.

Lowest ongoing variable rates

Source: RateCity. Note: Correct as at August 11, 2020.

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