Are You Paying Too Much For Your Mortgage?

Are You Paying Too Much For Your Mortgage?

The gross national debt value of households is growing in Australia.  Most worrying is that the Reserve Bank of Australia reports that debt is currently around 148% of disposable incomes.

In effect, this means that an increasing level of household income goes to paying off debt – in spite of our current low interest rates. 

This has not always been the case.  Households in the 1970s generally had an average debt of 33 percent of the annual disposable income.  That figure had risen by the 1990s to around 50 percent and by 2013 it had reached almost one-and-a-half times annual disposable income.

Household debt usually includes mortgages, credit cards, personal loans and car loans.  The Reserve Bank has calculated household debt to disposable income as a percentage of annual income after tax.

Not surprisingly, current house prices mean that mortgages are the single biggest proportion of that debt, comprising 133% of annual disposable income.  High house values also mean that the wealth of households (at least on paper) is correspondingly high.  However, borrowers still have to account for that mortgage every month.

Mortgage lenders recommend that repayments should be no more than 35% of gross income, if there is going to be enough money left over to cover living costs and some saving for a rainy day.  Obviously many mortgage holders are nowhere near that goal.

Additionally, studies suggest that a significant increase is personal insolvency in Australia is coming from the so-called middle classes.

A study by the University of Melbourne Centre for Corporate Law and Securities Regulation 2009 found that unsustainable home loans had been a major cause of bankruptcies among the middle class.    While more than half of all declared bankrupts earned less than $30 000 in 2011, an increasing proportion of bankrupts are coming from people with managerial and professional occupations who have relatively high levels of personal income and greater realisable assets and property ownership.  This would suggest that vulnerability to personal debt is more relative in relation its proportion of disposable income, than it is to its amount in dollar terms.

For many households high levels of debt to income leave them most vulnerable in the event of changes to income or interest rates increase. Many will find themselves in dire straits if income levels change due to the loss of a job or even a reduction in work hours.   

And few households have substantial savings so in the event of a loss of income many will run out of cash within a few months.

This leaves a growing number of households unable to manage their level of debt.  There are a number of options available to people who find themselves in unmanageable debt, including personal insolvency arrangements, debt agreements or bankruptcies.  All of these options have consequences, some of which are long-term.  An increasingly popular option is debt consolidation, but there are risks.  For more information on the risks of debt consolidation go here.

In 2011 of all personal insolvency cases, 34% cited that loss of a job or income as the cause and 57% disclosed ownership or purchasing of real estate at the time of entering a personal insolvency agreement. [1]

It is debatable whether increases in personal insolvency are as a result of increases in household expenses or increases in unnecessary overspending.    

Obviously, reduced debt levels make a household less sensitive to changes in individual economic circumstances, such as a reduction in working hours or an increase in interest rates.

In spite of the growing number of insolvencies, the good news is that some sectors of the Australian community are financially protecting themselves.   It seems that looming retirement for Baby Boomers and the recent global financial crises have brought changes to the way some Australians think about debt levels. 

More and more Australians are reporting that they have begun to live within their means and increased their savings levels.

If you find yourself with unmanageable debt or your income has recently changed, it is worth talking to a debt administrator about the options that are suitable to your circumstances.  For more information on debt management and budgeting go to Settle Debt or call on 1300 164 395.


[1] Profiles of Debtors 2011 by the Australian Financial Services Authority