How to Cope with Mortgage Stress
The front page of every newspaper has at least one major article each week on how people are suffering from the rising bank rates. Horrible stories of how people choose between buying food and paying off their house loans capture the headlines. The rising numbers of houses being sold by the banks in mortgagee sales tell us there are a lot of problems among young families.
Having dinner with a couple of young families lately, I asked about their repayments and found they were precarious, especially if one adult loses their income from not working for any reason. A new phrase has entered our language: “Mortgage stress”. Of course the stress from paying a mortgage is not new. I well remember when my wife and I were paying off our mortgage with four small children, and the interest rate during Mr. Keating’s Prime Ministership was 17%, we had to work out how we could afford our home plus our normal lifestyle.
How can you cope with mortgage stress today?
First of all, not all people are involved.
The newspapers can give the impression that this is a national disaster, and the recession in the USA can lead many people into thinking that it will happen here. If that causes people to be cautious with their spending, then that is good, but it is not true. Unfortunately, many conspiracy theory addicts compound the problem, but I would advise you to ignore these people. They just love having people anxious and troubled.
The fact is that a third of all households have no debt at all, while two-thirds of households have no owner-occupier housing debt, either because they’ve paid off their mortgage or because they rent. There! Two thirds of all Australians are not under considerable mortgage debt at all. But that still leaves one third. That is why I am writing this article, in order to help them. Read on.
Of all those with mortgage stress, the popular image is that of a struggling young family, with one income and three children, with school fees, and high travel costs to work each day. Again, that is not true. The big increase in people with mortgage stress is among middle-aged people who have traded up to a more expensive house, and with those people who have purchased an investment property with loans.
In other words, most of the mortgage stress is among middle aged people, with higher incomes, who hold good assets, and have relatively (relative to their income) low debt-servicing requirements. Some belt-tightening may be required, but they are in a good position to cope with the rise in interest rates. The percentage of loans in default is less than 3%, which is not much different from times when interest rates were much lower.
Clive Hamilton, Executive Director of the Australia Institute, says that most of the middle class have mortgages of around $100,000, and only 8% have mortgages of $200,000. Even those who have large mortgages are affluent enough to ride out the relatively small interest rate setbacks. The mortgage stress crisis is a myth, as they could overcome trouble by cancelling their holidays in Europe. (Ross Gittins, S.M.H.)
So how many people are actually facing mortgage stress? The Australian Mortgage Stress-O-Meter at www.fujitsu.com.au predicted, from data gleaned from its last survey, that a quarter of a million Australian homes would be in mortgage stress by the middle of the year, with up to 300,000 homes in severe stress to the point of being forced to sell. This is up by 58%, and consists of people in “severe stress”, behind in the mortgage payments, living off credit card debt, and who are defaulting or trying to sell up. (Australian Policy Online, www.apo.org.au )
“Housing stress” is defined as households paying 30 per cent or more of their income on housing costs. In one study, Professor Judith Yates found that around 862,000 low income and 164,000 moderate income households in Australia were experiencing housing stress. How can they cope? Read on.
Second, most of your money is building your assets.
A recent paper by two economists from the Reserve Bank, Chris Ryan and Chris Thompson, reveals the explosion in household debt. Since 1992, the disposable (that is, after-tax) income of Australian households has grown at a rate averaging 6 per cent a year. But the debt of those households has grown at a rate of 14 per cent a year. As a result, households’ total debt has gone from about 50 per cent of their annual disposable income (which was low by international standards) to about 160 per cent (which is among the highest in the world).
I guess many people would believe that debt could not get more than 100% of their annual disposable income. If all of that was on our credit cards, and was paying for stuff: clothes, trips, gambling, restaurants, etc, that would be something to worry about. But though we owe more on our cards than ever, the average balance per card is only $3000. The rest is for housing. Home loans account for 86 per cent of total household debt, with personal loans and credit cards accounting for the rest.
For some people that is because they have purchased a house they should never have purchased (“McMansions”), with money from lenders who should never have given them a loan. But the rest of that housing debt has been borrowed for investment properties, not owner-occupied housing.
The Government has encouraged that by giving tax breaks for negatively geared rental properties. So, most of our debt is actually increasing our net asset worth through us owning high priced properties. This means, of course, that what we have to show for that debt is a lot of expensive — that is, valuable — houses and units. If your debt gets too high you can always sell the property, pay off the debt and move to something smaller, provided the property you purchased maintains its value. Now, few properties retain their purchase value or increase it in the short term, that is why you should never borrow more than 90% of the value of the property, even if a lender offers it to you..
It is important for you to continue to pay the interest on your debt, and if under stress go to your bank and you will find most will take interest only for a period of time, giving you a chance to reduce your expenditure without losing your home. Most people paying off a mortgage pay about 15% interest cost and the rest is principal repayment.
Because your mortgage is in real estate, you have a valuable asset and the current ratio of household debt to asset value is 17%. Your assets also include any other valuables you may have, including your savings through superannuation. “If you subtract your debt from your assets, you find your net worth is equivalent to more than six times annual household disposable income.” (Ross Gittins SMH September 5, 2007)
Thirdly, what have the banks actually done?
In February 2008, the Reserve Bank of Australia announced that it would be lifting the Official Cash Rate (OCR) by 0.25 points to 7.00. http://www.rba.gov.au/ With extra bank costs, fees and insurances, this means all five major banks are charging about 9.5% interest on mortgages. (Non-Bank lenders are higher.) This was the 11th rise in a row – taking interest rates to their highest level in twelve years. This adds around $42 more to the monthly repayments on an average loan of $250,000. A mortgage repayment schedule appears at www.myfirstloan.com.au website.
Fourthly, where is Mortgage Stress most evident?
In this SMH article, “mortgage stress” is defined as a family devoting more than 30% of their gross income to mortgage repayments. www.smh.com.au/news/national/mortgage-stress-to-hit-home-at-election/2007 Most live in the area covering Strathfield South, Bankstown, South Western Sydney suburbs and in some areas of the Central Coast. Urban families are worst off at 37.7% living in mortgage stress, compared to regional areas at 28.8% of families affected.
Fifthly, how to cope when budgets are tight?
In 1980 I established Credit Line, the largest Credit Counselling Service in Australia. Over 25 years I lectured nearly one thousand counsellors who would help others. (See “Leaving a Legacy” p207-213.) My Golden Rule was, if you have borrowed money and spent it, you still have to repay it. But do not borrow more money or get more credit cards to repay it. In fact, start by cutting up all but one of those credit cards, especially the store cards which charge you about 25% interest. Then get help to draw up a budget and stick to it. CHOICE magazine gives tips for coping with a tight budget. In the June 2005 issue of Choice Magazine there was an article with 10 tips for saving money, and these are still practical: www.choice.com.au
Cut your bank fees by comparison shopping for accounts.
Do not open new accounts until you have discussed this with your present bank. They can lower rates, waive fees, extend the life of the loan, accept interest only repayments and so on. They want to keep you as a customer. Banks always lose money if they are forced to foreclose. Once, I had 26 years left on my mortgage and I was paying too much interest. I went to the most senior manager I could get to, indicated I was unhappy, asked for a lower interest rate, and wanted to pay my mortgage by direct debit weekly, instead of monthly. He did not want to do this at first, but then he cut my interest rate by almost 2%, allowed the weekly calculation of interest instead of monthly, and as a result, I repaid the mortgage in 17 years instead of 26 years, saved about $100,00 in repayments, and did it without increasing my weekly repayment! Negotiate with your bank!
Consolidate insurance coverage to one company.
By doing this they are able to give you a discount for having multiple policies with them.
Bundle and negotiate better deals with utility companies.
Bundle all bills in electricity, natural gas, telephone, Internet, mobile phone service, and cable television. They are keen to do this.
Travel in the off-season when prices are way down.
Better still, have a holiday at home.
Fit AAA-rated water-saving showerheads, and take shorter showers.
In a four-person household you will save about 1040 litres of water a day, and $380.00 per year in water and heating charges, if everyone showers for 5 minutes instead of 15. This is good for the environment, too. When replacing appliances buy the smallest one that suits your needs, not the largest, and make sure it has a high star rating for energy efficiency.
Install energy efficient bulbs through out your home.
These are free if you contact those organisations funded by the Government to replace your globes.
Don’t keep appliances on standby, but switch them off.
All those little LED lights burning all night are a sign of much a greater electricity use when you do not need it.
Insulate your ceiling and external walls.
This will reduce your heating and cooling costs. Internal blinds also help.
Cook larger meals and take the leftovers for lunch, or freeze them for an unexpectedly busy evening.
Bringing your lunch to work 3 or 4 times per week could save over $500 per year. Do not have regular meals at fast food outlets.
Make a shopping list and stick to it.
Avoid impulse buying. Planning meals in advance helps you to focus on what you really need. Buy the supermarket’s own generic brands. Any difference in quality is difficult to pick with staple products such as sugar, salt and flour.
Eat less meat, and use more pasta, lentils, beans and fish.
Don’t go shopping when you are hungry, bored or depressed!
Try to shop without your children.
They are targeted with colourful lollies and toys by the supermarkets. If leaving them with a sitter is not possible, try to keep them distracted with learning activities such as counting and identifying vegetables and fruit types.
Using a taxi once or twice a week can be cheaper than running a second car, which costs at least $2000 per year.
A senior CEO this week told me he has sold his car, travels by train, and funning his wife’s car costs just one third of what he used to spend on his.
Use public transportation.
Or walk – this choice is better for the environment, and your waistline.
Keep your animals healthy, well fed and exercised daily, in order to avoid veterinarian costs which can be hundreds of dollars a year.
Check out Choice magazine. This is available at your local library, to help you select the best appliances, household products, sunscreens, insurance, banks, and car dealers, etc.
Avoid using your credit cards.
Better yet, get rid of all but one credit card and regularly pay it off quickly.
Your house is your greatest asset. Change your lifestyle and you can keep it that way.
Rev The Hon. Dr Gordon Moyes, A.C., M.L.C.
References:
www.loanmarket.com.au/february-2008
www.rba.gov.au/ www.news.com.au/business/money
www.smh.com.au/news/national/mortgage-stress-to-hit-home-at-election/2007