Interest Rates and Mortgage Stress

Mortgage stress hit the headlines in 2007 and stayed there, despite falling interest rates over the last two years. Now, with the Reserve Bank raising interest rates, and being set to raise them twice again before Christmas, as many as 70,000 households in Australia are in severe danger of defaulting on their mortgage.

A Fitch Ratings report ranked Australia third in the world in terms of household debt vulnerability. And census figures indicated that 140,000 Victorians were under mortgage stress. House prices increased fourfold between 1985 and 2004, but incomes only doubled during the same period. This makes Australian housing, when compared with wages, among the world's least affordable. With the cost of living increasing at a higher rate than most people's income, loans are about the only way many people can afford to buy the things they need.

Refinancing of home loans has become quite common today. Lower refinance rates are the main reason why borrowers choose to refinance loans, although often people roll over their consumer loans into their mortgage. Refinancing is a way to get the loan - or all your loans - paid off quicker and cheaper by lowering monthly payments, lowering the term of the loan or just paying less interest. If you're a current borrower, you should always watch the refinance rates at your bank so you know when it's the best time to check into refinancing.

Don’t be an easy mark! Beside the mortgage rates, evaluate key features and benefits of the loan so there were no hidden fees. There are costs to refinancing such as establishment fees, application fees, solicitors fees and discharge fees, so make sure you are saving more than you are spending by making the switch. A single, average income home owner will need to earn an extra $7,000 a year to avoid mortgage stress if the central bank hikes official interest rates by two per cent over the next 18 months, market analysts say.

Mortgage stress usually occurs when mortgage holders are paying more than 30 per cent of their income on repayments. Currently, single, first home owners earning the national average wage pay approximately 32.7 per cent of their yearly salary on their mortgage. That means that most first home buyers are going to be somewhat strapped for cash.

How can you avoid mortgage stress?

Only borrow what you can afford to repay. Reserve Bank of Australia (RBA) governor Glenn Stevens said last month that anyone taking on a new mortgage should allow for at least a two percentage-point increase in interest rates. Maybe your aspirations need to be limited.
Increasing repayments, from monthly to fortnightly, or use a mortgage offset account can reduce the time to service the mortgage.

Remember that interest rates are also determined by how good a borrower's credit rating is. A poor credit rating will result in higher loan or refinance rates whereas a good credit rating will result in lower refinance rates. If you don’t borrow responsibly, you may find that avenues for low-interest loans dry up for you faster than they do for other people.

Speak to a Brisbane Mortgage Broker for advice on your home loan needs if you live in the Brisbane area. Contact us at http://www.moneynet.com.au/ today http://www.moneynet.com.au/