Despite lower mortgage rates, existing borrowers are unable to get cheaper deals

More than 1 million borrowing households in Australia are struggling with mortgage stress amid the low interest-rate environment, according to a study by Digital Finance Analytics (DFA).

Mortgage stress continues to plague one in three borrowing households, with more than half of young growing families exposed to it. The study predicts defaults of up to more than 83,400 over the next 12 months.

"These results are of no surprise, given the ongoing pressure on incomes and rising costs, despite somewhat lower mortgage rates for some borrowers," said Martin North, principal of DFA.

North explained that many existing borrowers are unable to access the lower rates banks offer to new customers, leaving them stuck with expensive home-loan costs.

"These households are not reducing their debt, rather in some cases, they are turning to additional finance to try and bridge the cash-flow gap. Or they are raiding savings if they have them, and are putting more on credit cards," North said.

Households are in mortgage stress if their expenses, including mortgage repayments, exceed their income.

"This is not defined by a set proportion of income going on the mortgage. They may have assets they could sell, but nevertheless, in cash-flow terms, they are underwater," North said.

Tasmania has the highest share of households in mortgage stress at 36.9%, equivalent to 31,700 borrowers who are struggling with repayments.

In terms of defaults, Western Australia reported the highest rate at 4.2%, above the national average of 2.2%. The share of borrowers in mortgage stress in the state is 33.6%, equivalent to 152,000 households.

North said most of the highly-stressed areas are in fast-growing, highly developed suburbs on the fringes of many major centres. These areas have many newly built properties on small lots and little infrastructure.

"As a result, a significant proportion of income goes on transport costs, and so despite many households having above-average incomes, their larges mortgages and high expenses are putting them under continued severe pressure," he said.

North said those in mortgage stress need to be more aware of their financial health. He said households need to map out their cash flows and focus on repaying high-interest debts first.

North also advised against refinancing or restructuring.

"While this may provide a short term path to relief, unless households in difficulty change their behaviour, it will not be a long-term fix," he said.