Buying Properties in a Volatile Market – The Three Things You Need to Do to Avoid Mortgage Stress

Mortgage stress affects thousands of owner-occupiers in Australia. Here are the things you can do to take control.

The Australian property market’s boom period was great news for investors. They could get loans with lower interest rates and saw the value of their properties skyrocket.

But for those buying homes for themselves, this boom period created a problem. Thousands of people ended up having to borrow more than they could afford due to rising housing costs. 

Now they’re struggling with the consequences.

The combination of high mortgage repayments and rising costs of living has led to widespread mortgage stress.

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What Is Mortgage Stress and What Causes It?

When talking about mortgage stress, rating agencies tend to focus only on defaults.

DG Institute recently interviewed property analyst Martin North. He discussed how this type of financial stress starts much earlier.

“…Each time I analyse a household, my question is does this particular household have sufficient income coming in each month to cover the cost of living, the mortgage repayments, and everything else?”

When that isn’t the case, the household is experiencing mortgage stress. 

He goes on to point out that 32% of households in Victoria and NSW experience a mortgage-related shortfall each month. And when household income isn’t enough to cover the costs, debt levels start to rise. 

ABC News reported on the issue in April 2019. They looked at an independent survey conducted by Digital Finance Analytics:

“Its survey data shows a record number of Australian households – more than a million, which is one-third of all homeowners with a loan – struggled with some degree of mortgage stress in March <2019>.”

“Perhaps more concerning though is that DFA estimates roughly 66,700 households are currently at risk of defaulting on their mortgage. That is the highest level in almost two decades.”

The biggest misconception about mortgage stress is that it only affects low-income households. However, this data shows that it affects one third of all homeowners. That means the problem extends much further than many of us are willing to admit.

The key is to avoid putting yourself in a situation where you experience this type of financial stress. These are the things that you can do to protect yourself.

Tip #1 – Acknowledge the Problem

Debt builds when homeowners fail to acknowledge the scale of the problem.

You have to be honest with yourself, which means sitting down and talking about the taboo subject of debt.

You may have a property that’s worth $1 million or more. This may fool you into thinking you’re in a financially stable situation. But if the costs related to that property, along with the home loan repayments, are too high, you’re experiencing stress.

Debt isn’t necessarily a bad thing. As long as you’re creating it with a strategy in mind, as property investors do, it’s usually something you can leverage.

Mortgage stress arrives when you try to ignore bad debt or try to justify it because you have a valuable asset.

Tip #2 – Avoid Blind Refinancing

In his interview with DG Institute, Martin North highlighted another problem:

“The more you struggle, the more you refinance, the more that you go and grab more credit card debt, or even paid a debt to try and get out of it, the worse it gets.”

He’s warning against blindly refinancing and taking out more loans to try to solve the problem.

His advice is to create a budget so you know exactly what’s happening with your money. Outline all of your income streams and every expense you have. From there, you can create a plan to clear debts and reduce expenditures.

Think of it in business terms. 

In a business, you need a positive cash flow to keep the company alive. If more money goes out than comes in, the business eventually fails.

The same goes for your property. If you’re overspending on non-essentials, you’re creating expenses that will lead to negative cash flow.

Refinancing or taking out a loan may offer a short-term solution to the problem. But you’re just creating more debt that will affect your cash flow.

Again, make a plan before you take action.

Tip #3 – Be Realistic

Martin North goes on to point out that organisations like the RBA may be complicit in creating mortgage stress:

“…The Reserve Bank has been encouraging households to spend because household expenditure has been a considerable support to the GDP for a good number of years, particularly as the mining boom went away a few years back.”

This is particularly important to consider as an investor.

You may feel you can afford more than you really can thanks to encouragement like this. It’s crucial to have a realistic outlook in terms of what you can afford when building a portfolio.

If a loan offer sounds too good to be true, it probably is. Interest-only loans, for example, may seem like a good choice to help with cash flow issues when you first buy a property.

But what happens when they revert to principal and interest loans?

Your monthly repayments go up and you’re left struggling. 

Being realistic in terms of what you can comfortably afford will help you to mitigate the risks associated with owning property.

Eliminate Your Mortgage Stress

The key to avoiding mortgage stress is acknowledging that it’s a possibility in the first place. That means putting more thought into your actions beyond seeing if you can get a loan and then taking it.

Think about how that loan will affect your cash flow. Consider what might happen if the economy or the property market changes.

Be realistic about what you can afford. And if you’re already in mortgage stress, avoid blindly refinancing to cover short-term costs.

DG Institute is here to help if you’re struggling to escape from mortgage stress. Our debt specialists can help you create a plan of action. Plus, we may be able to help you negotiate with your creditors to alleviate some of the burden.

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DOMINIQUE GRUBISA

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at info@dginstitute.com.au

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This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.