TRANSCRIPT
Mortgage stress - it's the new reality for so many Australian households.
It follows the cash rate's increase from 0.1 per cent to 4.1 per cent in the last 18 months. New research from financial comparison site Mozo shows one in six Australians have to fork out 40 to 60 per cent of their monthly household income to cover their mortgage.
Kylie Moss is the Content Director at Mozo.She says when repayments are more than 30 per cent of a household's income, these households are considered under what she calls "mortgage stress".
"So what this means is that the industry benchmark for what is classified as mortgage - the standard ratio for identifying mortgage stress - is around 30 per cent. So that actually shows just how many homeowners there are out there now in Australia who are kind of bundled up in this bucket of being under mortgage stress."
For Australian borrowers, fixed interest rates are usually offered for a period between one and five years as an alternative to variable rates, which fluctuate with the cash rate. Record low cash rates in 2020 led to record low interest rates on mortgages - around the 2 per cent mark.
But those who locked in low fixed rates during this time are now facing steep increases in mortgage repayments. This is because most low fixed term rates secured in 2020 are set to expire in 2023 and 2024.
The shift from fixed rates back to a lender's standard rate is known as a "mortgage cliff".
Canstar's finance expert Steve Mickenbecker says borrowers do have options.
"If you're in a position where your position's not totally stressed, refinancing to a lower priced loan. If you're already in a highly stressed financial situation, refinance is probably not going to be available to you because a new lender is not going to say sure we'll take on your higher risk loan. Now if you're in that situation, you really have to turn around and say now how can I actually improve my household finances? So you look at the money that comes in and the money that goes out, and say well can I increase the money that goes in through a second job or overtime or something. And can I reduce the money leaving the household by making savings."
While the Reserve Bank of Australia has halted rate increases over the past few months, another rate hike is expected before the end of the year. According to Ms Moss, this means now is the time for action.
"Now is not the time to kind of rest on your laurels and kind of ride out the storm. It's actually a good time to really go and have a look at what kind of deals you can get because interest rates are going to stay at this level for a period of time."
According to Mr Mickenbecker, rates of switching banks to a cheaper loan - otherwise known as refinancing - hit a record in July of $21.4 billion dollars. But he says that's only one per cent for the month of the full number of outstanding home loans, meaning more borrowers could be actively refinancing their loans.
He says borrowers should take action now instead of waiting for interest rates to plummet in the future.
"There are plenty of borrowers who aren't taking advantage of the lowest rates available in the market. And really people have to start getting the message and doing something about it for themselves. Don't wait for the Reserve Bank."
