What mortgage stress is and why should we care

by Chris Lang on September 3, 2009

Mortgage stress
If you watch or listen to or follow the news in whatever way, you couldn’t have missed this bit – on Tuesday this week the interest rates were left on hold by the RBA.

Phew… that was close.

What was close, you say? Mortgage stress, that’s what. For the folks who only heard about the mortgage part, but never about the stress part, here the exact definition of a mortgage stress: when people are paying above 30 percent of their income on mortgage repayments, they are under mortgage stress. In basic human language it means that they find it much harder to make the ends meet.

If this article catches you before you made a decision to take a mortgage, good. Because there is something you need to know: Reserve Bank of Australia (RBA) governor Glenn Stevens said that anyone taking on a new mortgage should allow for at least a two percentage-point increase in interest rates. Translation: they are going to increase the rates in the nearest future. To avoid getting into a loan that is too heavy for you, see what your repayments will be if the interest rates raise 2% and then see if that number is still less than 30% of your income.

Of course they won’t raise the interest rates 2% overnight, but it is possible – and even likely – that by the middle of 2010 the rates will rise 1%. I’ve never liked percentages because they can look deceivingly small and insignificant, but if you look at the real numbers – they never lie.

Let’s take the average standard variable mortgage of 270K (according to Australian Bureau of statistics). Let’s assume you’re currently paying 5% interest on that kind of loan over 15 years. Your monthly repayments would be around $2,135. This means that if you are earning anything less than $7116 a month, you’re in a mortgage stress already.

If they raise the interest rates 1%, your monthly repayments will become $2,278. That would mean that to not be in mortgage stress you’ll need to earn over $7593 a month. Do you expect a pay rise of over $5700 in the next 6 months? If you’re not, mortgage stress looks very likely to occur.

You can do this little exercise on any numbers using this helpful calculator here, and my message is loud and clear: please don’t bite more than you can chew, even if the banks let you.

Have you ever experienced a mortgage stress? How did you solve this problem?

{ 2 comments… read them below or add one }

Josef September 13, 2009 at 2:19 pm

I am renting a paying 30% of my income for the rent, if we continue to pay that much as a rent or loan repayment wouldn’t this effect our living standard?

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Chris September 13, 2009 at 2:54 pm

Well, if 30% is very close to mortgage stress, and those are your loan repayments, then imagine what happens when the interest rates go up. If you’re renting, at least you can find a cheaper place to live if you can’t afford the rent any more – if you’ve bought and can’t repay the loan, now that’s much worse.

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