Mortgage stress is climbing, despite record low interest rates

Mortgage stress is on the rise despite the decline in interest rates, according to a new report from Roy Morgan Research. 

Mortgage stress rose to 17.3% of borrowers in July, an increase of 0.3% over the last 12 months. Home loan rates were based on the standard variable-rate from the Reserve Bank of Australia (RBA), which averaged 5.25% from May to July, down from 5.4% for the same period last year.  

“It appears from this research that fewer people are taking out home loans and those that do have increased their borrowings, most likely as a result of low interest rates and rising house prices,” said Norman Morris, industry communications director of Roy Morgan Research.

“With median household incomes among borrowers showing low growth over the last year, they are not paying off their loans as quickly and as a result outstandings are growing faster than household incomes. The result has been an increase in mortgage stress to the point where nearly one in six borrowers face a potential problem.” 

Over the last 12 months, there has been an increase in mortgage stress for those classified as being “at risk” (based on the amount borrowed) and those deemed “extremely at risk” (based on the amount currently outstanding). From May to July 2016, 17% of mortgage holders were deemed at risk. This percentage has increased to 17.3% in July of this year. Over the same period, those considered to be extremely at risk also grew from 12.4% to 12.8%.

The main cause of the rise in mortgage stress? Over the last year, the median household income of mortgage holders has grown by 2%, well behind the increase in the median amount borrowed (up 7.4%), as well as the median amount outstanding (up 13.1%).

“When rates eventually rise, this is likely lead to an even lower number of borrowers but existing mortgage holders who have borrowed in a low interest rate environment are likely to face increased levels of mortgage stress,” Morris said. “The final impact however will also be determined by what happens to household incomes, which are currently showing very modest growth”.