Has mortgage stress become the norm?

There is no single definition of ‘mortgage stress’. Generally, it refers to a financial situation where a homeowner is spending more than 30% of their pre-tax income on mortgage repayments.  

Obviously, everyone’s personal circumstances are different, so even if you don’t meet this definition you may still be feeling stressed due to your finances. Some factors can include whether you’re single or a couple, have dependent children, have other financial commitments and your general expenditure levels in daily life. 

Here, we’ll discuss how common mortgage stress is in Australia. We’ll also take a look at the underlying causes of mortgage stress and who is being most affected by it. 

• Where you find yourself in mortgage stress, we recommend the following: 
• Look at easy ways to reduce your current expenditure. 
• Contact the National Debt Helpline for free and confidential financial counseling support
  
• Speak with your lender about altering the terms of your current home loan 

Most importantly, mortgage stress can have a profound impact your mental health and relationships with your family and friends. If this is happening to you, please take pause from reading this article and visit Health Direct's website (an Australian Government funded service).

Australia has several different services that can confidentially support you through feelings of depression, stress and anxiety that might be caused by mortgage stress. 

Mortgage stress? You're not alone

After the Covid-19 pandemic emergency settings saw the RBA decrease the cash rate target (an interest rate that banks pay and receive on overnight reserves) to an all-time low of 0.1%, it began raising rates in May 2022. The long march to bring inflation under control has resulted in 13 increases that have left the cash rate target at 4.35%, their highest levels since December 2011.

Directly and indirectly impacting their own cost of funding, all home loan lenders have steadily increased their interest rates by increasing the repayments they expect from new and existing mortgage holders. It’s a little more complex than that, but more on that later.

Roy Morgan (an independent research company) uses its own definition of mortgage stress, classifying ‘At Risk’ as those paying more than 25-45% (depending on income and spending) of their after-tax income into their home loan. They also have an ‘Extremely at Risk’ definition that recalculates this number based on ‘interest only’ payments, which is effectively the smallest payment a mortgage holder could make without defaulting on the loan.

In December 2023, it estimated that 30.3% of owner-occupier mortgage holders were ‘At Risk’ of mortgage stress. This equates to 1.527 million households and 720,000 more than when interest rates started rising (Source: Roy Morgan) For context, the proportion is yet to reach the Global Financial Crisis (GFC) peaks of 35.6% in May 2008. It is, however, close to the September 2023 record high of 1.573m Australians at risk of mortgage stress.

The equivalent number of Australians presently estimated to at extreme risk of mortgage stress is 964,000 or 19.8% of all owner-occupied mortgage-holders.

If you own your own home and fall into either category, know that taking a random walk down your street will see you pass many homes with owners trying to navigate the impacts of mortgage stress on top of their daily lives.

You are not alone.

A short story: How we became mortgage stressed

To understand why so many Australians have found themselves in mortgage stress we need to dig a little deeper than the mainstream’s media explanations. To get it out of our system, let’s yell the headlines in order:

• Emergency settings keeps investment high and unemployment low!
• Inflation!
• The RBA lied about interest rates staying low!

The story is a little more nuanced than that, so without writing a thesis on the history of Australia’s fiscal (government) and monetary (central bank) policy settings here’s a short story.

Chapter 1 – The low growth, low inflation and low interest rate post-GFC decade

The Global Financial Crisis (GFC) was the most severe economic crisis since the Great Depression. It is popularly marked by the collapse and bankruptcy of Lehman Brothers on September 15, 2008.

By the time 2009 came along, it was clear that the world would not be the same for some time. In Australia, we were one of the few economies to avoid the ‘Great Recession’ part of the GFC. Having said that, it laid the ground for a decade of low growth, low inflation and low interest rates.

Between 1961 and 2008, average GDP growth was 3.7%, in the period from 2009-2019 average growth was a full percentage point lower at 2.6%.

At the same time inflation also fell dramatically from its 1961-2009 average of 5.4% to 1.7% between 2015 and 2019. (Source: The World Bank data). Remember that the RBA targets inflation of between 2-3%.

In the immediate response to what was playing out through the GFC, the RBA reduced interest rates during 2008 and early 2009 to from 7.25% to 3%. After a premature attempt to raise interest rates in late 2009 and early 2010, the RBA held them steady at 4.75% until November 2011 when it commenced the long and steady descent to 0.75% in October 2019.

Chapter 2 – The COVID-19 pandemic; more stimulus

December 2019 saw the discovery of a new virus, namely COVID-19. We all know the story.

As different nations responded to the economic side-effects of the pandemic response measures, the Australian Government and RBA both smashed their accelerator pedals to the floor to ensure people remained in jobs and were able to stay in their homes and feed their families.

An independent review of the Australian Government’s JobKeeper program, supporting 4 million employees and 1 million businesses, totalled the cost at $88.9 billion. (Source: Australian Government, Treasury) [1]

In early 2020, the RBA reduced the cash rate target to 0.1%. Later that year, it fired up the money printing press in what is affectionately known as Quantitative Easing (QE). This program saw the RBA create (literally – out of thin air) a total of $469bn, and use it to purchase $281bn worth of government bonds in secondary markets and lend $188bn to banks through its Term Funding Facility.

By doing this, the RBA was able to further supress interest rates and ensure the Australian banking system had sufficient access to low-cost funding to remain liquid and stable.

With all this cash in the system, the effects were pronounced. Companies maintained existing staff through the early throws of Covid-19 uncertainty with Job Keeper, and began investing in future growth with low cost of borrowing. Despite this incredible fall in unemployment, wages were slow to increase.

	Dec 2019	Dec 2020	Dec 2021	Dec 2022	2023
Unemployment (Seasonally adjusted)	5%	6.5%	4.1%	3.5%	3.9% (Dec)
Household Saving Ratio	7.1%	14.2%	12.1%	3.8%	1.1% (Sep)

Source data: Australian Bureau of Statistics (ABS)

Nonetheless, the Covid-19 restrictions on mobility translated into households saving more of their income each month, reaching a peak of 20.4% in September 2020 (Source: ABS). When teamed with record low mortgage interest rates, more buyers were showing up to auctions with greater purchasing power than ever before.

The outcome of this is demonstrated by the by the average loan size for owner-occupiers (i.e. people buying and living in their homes) growing 69% to $598,867 in the decade to September 2023. Were loans to have grown at the same rate as wage growth, the increase would have been a more modest 27% and $94,887.

A close look at the graphic below shows just how large the gap reached during the period between the start of the Covid-19 pandemic (Dec 19) and the shock of the first interest rate increase by the RBA was received in May 2022.

Note: The Wage-Price Index (WPI) measured by the ABS and is the general measure of wages growth throughout the Australian economy. It can be thought of in the same way CPI is used to measure inflation.

Chapter 3 – The inflation response and interest rate medicine 

So back to that harmlessly low inflation of 1.7% from 2015-2019.

After almost 12 months of Covid-19 uncertainty, household spending returned to early 2019 levels (i.e. pre-covid) for the first time in October 2020 (Source: ABS). By June 2021, the CPI had reached an annual rate of 3.8%, well outside the RBA’s target range of 2-3%. With household spending only 10% higher than 2019 levels, what was going on?

The accepted wisdom was that the growing inflation was temporary. The finely tuned supply chain ecosystems that saw iron ore extracted from the ground before being delivered in its final form (e.g. a car), had been given a gigantic whack by Covid-19.

Everything from the spiralling cost of shipping, through to semi-conductor shortages (there are between 1000-3000 in every car) caused by car makers cancelling orders early in the pandemic as they predicted slowing car sales, was being blamed.

With the same amount of people wanting cars and less of them to go round, prices began rising everywhere. This was predicted to be temporary, as the materials and labour needed would become more consistently available.

	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Annualised CPI	3.8%	3.0%	3.5%	5.1%	6.1%	7.3%	7.8%
Household spending compared to Jan 2019	110.6%	103.5%	132.1%	120.6%	128.6%	133.8%	147.8%

Source: ABS - Consumer Price Index, Australia (December Quarter 2023)
Source: ABS - Household spending, current price, calendar adjusted (indexed to January 2019)

But inflation kept rising. By March 2022, annualised inflation had hit 5.1% and it was looking like what Americans describe as a five-alarm fire. Household spending was 20.6% greater than January 2019 and by May 2022, the RBA began raising interest rates to try and quell this spending and the potential for inflation to begin snowballing through a vicious cycle of people expecting inflation, demanding higher wages followed prices rising to cover these costs of production. 

And it did keep rising, with CPI peaking at 7.8% in December 2022. June 2023 saw the second last of the RBA’s interest rate increases and inflation had begun its descent (6.0% on an annualised basis). 

By the end of 2023, the cash rate was 4.35% and the average variable home loan interest rate was around 6.5%.

Chapter 4 – The mortgage cliff and mortgage stress  

With interest rates and repayments increasing since May 2022, why has it taken so long for mortgage stress to increase from 17.5% in March 2022 to 30.3% in December 2023 (Source: Roy Morgan)?

There is no single answer, but a few explanations for the long and variable lag are: 

The ‘mortgage cliff’  

• During the low-interest rate environment, fixed-rate mortgages doubled to nearly 40% of all existing loans. In October 2023, the RBA reported that 45% of these had their fixed terms expire and had transitioned to higher variable interest rates. The majority of the remaining low-interest fixed mortgages will transition in 2024.
  

The ‘savings buffer’ 

• Approximately two-thirds of homeowners with fixed-rate loans have savings buffers equivalent to at least 12 months of repayments. This means that even when those households do face higher interest rate repayments, they can sustain their existing standard of living  and spending for quite some time. 
  

Modest rises in unemployment 

• October 2022 saw unemployment low of 3.4% and while rising interest rates have triggered households and companies to begin cutting back, unemployment had only increased modestly to 3.9% in December 2023. While unemployment remains low, many Australians will be able to make home loan repayments.

How to deal with mortgage stress

With many economists only predicting the first cut to interest rates late in 2024, homeowners suffering from mortgage stress have options now. 

Saving on interest and living costs is easier said than done. In this separate article, we detail how you can save the equivalent of one interest rate rise in repayments just by switching up a few products and services: 

• Utilities (e.g. Electricity, gas, home internet and mobile)
• Grocery shopping
• Insurance and excesses 

Once you’ve reviewed your expenditure, the next step is to look at your home loan itself. While meeting the definition of ‘mortgage stress’ will make it difficult to switch lenders might, there are several good options to speak with your current lender about.  

• Check whether your lender is advertising a better variable rate and ask them to match it.
• Apply to refinance as an ‘interest only’ loan.
• Request a ‘hardship variation’ for your existing loan, which can include accommodations like temporary repayment reductions, loan extensions, waiving of fees and many others. 

Note: If your lender does not reasonably consider a hardship variation request, you can lodge a complaint with the Australian Financial Complaints Authority (AFCA).

For those considering selling their home as a bigger step away from the mortgage stress cycle, an alternative pathway is a shared equity agreement. Shared equity involves a third-party partner paying the homeowner a lump sum of cash in return for a share of future property growth. 

The advantage of shared equity in this situation is that you are able to keep living in the home you love. Just as importantly, it avoids the transaction costs of selling your existing home and buying a smaller one. Real estate agent commissions and stamp duty can cost tens, if not hundreds, of thousands of dollars.

It is important that you seek professional advice from a financial counsellor or lawyer before making any decisions. Free and confidential financial counselling is available through the National Debt Helpline.