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What Causes Home Loan Defaults?

Young woman worried about mortgage repayment noticeMany Australians believe that rising interest rates have the biggest impact on the rate of mortgage defaults.

Although high interest rates do put pressure on homeowners, the reality is that there are a number of other factors that play a larger role in perpetuating ‘mortgage stress’.

The current high cost of living coupled with little change in income is one factor that is putting a wide-range of home owners on shaky ground.

Often though, it is sudden life changes such as job loss, divorce and the death of a partner that can often have the most dramatic results.

Read on to find out how can you can better manage your mortgage and avoid default.

Aussie home owners are managing

As at September 2013, mortgage delinquency rates dropped to 1.25% nation-wide, down from 1.45% at the end of March 2013, according to credit ratings agency Fitch Ratings.

Lenders mortgage insurance provider Genworth reported similarly positive results in its March 2014 Home Buyer Confidence Index (HCI) report.

A total of 2026 Australian adults were surveyed on their mortgage repayment expectations over the next 12 months. The online panel consisted of 1,240 people who currently had a mortgage on their own home and/or investment property including 126 respondents who bought their first owner-occupied property in the last 12 months.

Among its findings, the HCI report found that the proportion of Australians who anticipated that they would easily be able to meet their mortgage repayments every month in the next 12 months was 52%, a slight fall from this time last year (56%).

One of the factors in the drop had to do with the increase in average loan sizes as a result of rising property prices over the past two years. As such, the proportion of home owners that overpaid on their repayments slightly decreased in the past year (March 2013-14).

So are Australians on the default doorstep? Not necessarily.

What the survey also found was that the proportion of Aussies allocating more than 50% of their income to servicing debts actually dropped from 28% to 25% over the same period.

“What the underlying data may point to, therefore, is that home owners seem to be managing their finances by reducing overpayments,” the report stated.

“Australian home owners are far from being in the red, and actually have greater ‘after-debt’ disposable income than they had before.”

Despite these positive signs of good financial management among Australians, mortgage stress is definitely on the rise, with 28% of home owners reporting difficulty making repayments in the last 12 months compared to 25% in September 2013 and 18% in September 2012.

Are you having trouble making your repayments? If your mortgage is in arrears, one our expert mortgage brokers can help you to refinance your loan or organise debt consolidation with the right lender.

Give us a call on 1300 889 743 or fill in our free assessment form today.

It’s not interest rates!

So, what causes mortgage default? Well, contrary to media reports spouting the negative effects of rising interest rates on the ability of home owners to make their repayments, it is actually the lowest driver of mortgage stress at 13%, according to Genworth.

This is after hitting 55% as recently as 2011! Obviously, much of the current complacency with interest rates has to do with the current historically low RBA cash rate, which has been sitting at 2.5% since August 2013.

Although home owners are less concerned with rising interest rates, the effects of the media are always a potent sting and and reports should be taken with a pinch of salt.

Cost of living hurts

Rather than rising interest rates, it’s the higher cost of living which has continued to play a key role in mortgage stress, hovering at just over 50% year-on-year, the report found.

In spite of the cost of living, the struggle to meet home loan repayments as a result of other debt obligations appears to be less of a concern for home owners going forward then it was in the past, supporting Genworth’s assessment that home owners are largely managing their finances well.

No job, mo’ problems

Going forward, it is job loss of either self or partner that is now a greater driver of future mortgage stress than the need to make repayments on unsecured debts such as credit cards and personal loans.

Work injuries or illness go hand in hand with the effect of being unemployed or made redundant, specifically, if you find out you’re not entitled to workers compensation. It happens more often than you think!

If you do qualify for compensation, the compensation may not be enough to cover both the cost of living and loan repayments, specifically because you as an employee may not receive the maximum compensation payment. A delay in receiving the payment is another problem that catches many people out.

Remember, unless you have income protection insurance, injuries or illness sustained outside of work will not be covered by workers compensation!

Death and divorce

The death of a husband or wife can be both emotionally and financially devastating. Divorce is similarly devastating because, like unemployment and the death of a partner, it involves the sudden loss of a second income source.

The difference with divorce is that it can involve ‘child’s play’ between you and your spouse. When lawyers get involved in the process of buying out your ex, they will often advise each party to stop paying the mortgage!

They advise the ex-partner to do this because they believe that the other party is likely to get a larger share of the equity in the property so any payment on the home loan is money down the drain.

Since both parties are liable for paying off the mortgage and payments have already been missed, the ex-partner wanting to buy out their ex will have difficulty applying for a loan to complete the settlement due to now existing black marks on their credit file.

Luckily, our brokers are here to help if you’re in this situation! Please call us on 1300 889 743 or fill in our free assessment form.

Problems with pay

Any sudden change to one’s income was identified as a top driver for future mortgage stress in Genworth’s report, with ‘fewer hours worked/lower pay for same work’ on par with unemployment at 20%.

In fact, this driver was identified as a greater concern than it had been in the past, rising five percentage points.

Similarly, ‘new job with less pay’ was still above the long-term average of 9%, at around 13%.

Business owners and contractors suffer problems with pay on a regular basis as they’re often waiting to be paid from their customers.

Business failure can be even more devastating. When mortgage stress combines with a large credit card debt and a high interest business loan, the likelihood of mortgage default, the need to sell the family home and bankruptcy are all too real!

No matter the personal and financial situation, the HCI report stated that a greater proportion of home owners are anticipating stress in the next year.

“If their predictions continue to be accurate then over the next 12 months, as much as 30% of homeowners could struggle to meet their mortgage repayments in some or all months.”

How to avoid defaults

One way to help you avoid mortgage stress and defaults is to set-up an offset account and to save money as a buffer in case of unforeseen circumstances.

According to Genworth, around 35% of homeowners currently have an offset account and this has helped people to not only meet their repayments but to pay their entire mortgage off sooner!

The figures don’t lie! Around 23% of offset account holders said they had difficulty meeting their repayments compared to 32% of those who didn’t have an offset account.

Even under mortgage stress, offset account holders are much less likely to miss repayments.

Another way to ease mortgage stress is to ask your broker to speak to your lender about changing your mortgage to interest only. Similarly, if you’re on a variable rate, ask for the loan to be switched to a fixed rate so you can better manage your budget with smaller repayments.

Although banks don’t generally have ‘hardship’ provisions in place for people currently struggling with their mortgage, if you’re concerned that you may get into mortgage stress, the banks will generally help you with some options.

If you’re already behind with your payments then your lender will charge you a default or penalty interest rate.

The bottom line is that the longer you put off making a change to your financial situation, the more that bank, lawyer and real estate fees will eat into the equity in your home.

Give us a call on 1300 889 743 or fill in our free assessment form. One of our brokers can properly consider your situation and guide you towards the best possible solution.