RBA warning issued as Australian home owners owe more on their home than its actual value
Interest rates are at record lows, but Australians are still struggling to repay their debts. People have the white picket fence, but don’t own a single post. This is what you need to know to stay out of mortgage danger.
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Home loan interest rates have never been lower yet some Australians are up to their eyeballs in debt and cannot meet their repayments.
It’s frightening stuff.
Our household debt is sitting at around high as 190 per cent of our household income - more than most other countries - and certainly not something we would be proud of.
The Reserve Bank of Australia’s biannual Stability Review, out today, found household debt has continued to climb - although more slowly - however there’s still many households in the red.
RBA governor Philip Lowe cut the cash rate to just 0.75 per cent this week and some lenders are offering deals under three percent.
So if you cannot afford your loan now then there’s Buckley’s chance you will when rates are higher.”
Nationally about 15 per cent of loans in arrears are also in negative equity - a double whammy.
They cannot meet their repayments and their mortgage is bigger than the actual value of their home.
They have the white picket fence but they don’t own a single post of it.
But on the flipside the amount of prepayments made on home loans - either money held in offset or redraw accounts - is now sitting at borrowers being 2.5 years in front.
But don’t forget about the one-in-three borrowers who have less than one months’ worth of prepayments in the can.
Rising Tide Financial Services’ director Matt Hale said redraws and offsets could be a dangerous strategy.
“The problem is you can get your hands on the money when you want it,” he said.
“If you’re vigilant and have a long-term history of saving it may work, but try not to get into the habit of using a redraw. It’s a trap.
“It’s like having a block of chocolate in the fridge, once you’ve done it once you’ll keep going back.”
Mr Hale urged borrowers to only take on debt they could afford because rates would not sit at historically-low levels forever.
“My biggest is concern is we are in the lowest interest-rate period ever and people are in arrears, people with this debt need to get a better handle on their spending.”
Commsec chief economist Craig James said the negative equity could also impacted people who had mainly purchased propertyin the past year or so.
“Home prices have only just started to rise in the last couple of months,” he said.
“We do know home prices are rising now and not falling...the job market remains in pretty good shape and interest rates remainlow.”
But for any borrower out there now they should be focused on paying down their debt and getting ahead - certainly not whatthe RBA wants.
They have kept slashing the cash rate in the hope that we would spend.
“The economy could do with a little more spending,” Mr James said.
“We saw strong retail figures out today.”
Aussies are slowly up their wallets again - retail spending rose by 0.4 per cent in August which could be a result of therate cuts and tax offsets.
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RBA warning as Aussies borrow too much
One in 27 borrowers owe more on their homes than their value and it’s been blamed on falling house prices and growing unemployment rates.
Alarming new findings from the Reserve Bank of Australia’s latest biannual Financial Stability Review, released today, found negative equity — where the value of the home is less than the outstanding loan balance — is on the rise.
The review has run the microscope over the nation’s financial status and highlighted that house loan arrears also increased despite interest rates tumbling three times this year to a record low of 0.75 per cent.
The report found more than half of loan balances that have fallen into the dangerous territory of negative equity are in Western Australia and the NT, but the danger zones have also spread to the eastern states.
“A further 10 per cent decline in housing prices in Western Australia and the Northern Territory is estimated to result in the share of loan balances in negative equity in these regions increasing from a little under one-fifth to over one-third,” the report said.
“There have also been some small increases in the share of loan balances in negative equity in NSW and Victoria.
“However these shares remain very low in absolute terms and housing markets in these states have stabilised.”
The rate of negative equity has soared from just under 3 per cent in the RBA’s April Stability Review to now 3.75 per cent of all home loans.
The Review also pointed about that if borrowers had difficult servicing their loans they would be unable to resolve the problem by selling up.
Household debt has also continued to climb in early 2019, despite growing at a slower pace.
However the report said the “level remains high” despite the tightening on macroprudential policies and reduced expectations of future housing price growth but the level remains high.
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As for home loan arrears — those who are more than 90 days late in payments — rose steadily over recent year.
“Nationally around 15 per cent of loan in arrears are also in negative equity, although this is equivalent to just 0.1 per cent of loans,” the report said.
“If economic conditions weaken or housing prices and turnover fall further there is a risk that housing loan arrear rates could rise from their current levels.”
On the flip side though mortgage customers with fat buffers remained stable.
For prepayments — this included amounts held in mortgage offset or redraw accounts — sat at about 2.5 years or 16 per cent of outstanding loan balances.
However on the flip side, concerningly 30 per cent of borrowers had less than one months’ worth of prepayments, however they might be investor or fixed-rate loans where you are restricting from paying ahead.
KEY POINTS
• Household debt in Australia is around 190 per cent of household income.
• Around three-quarters of the debt is owed by households in the top 40 per cent of the income distribution.
• Rising unemployment or ongoing weakness in income growth would likely see an increasing share of households struggle to make their debt repayments.
• About 3.75 per cent of borrowers are in negative equity.
• The increase in arrears for loans that started as interest-only is around double than those that started on principal and interest repayments.
Originally published as RBA warning issued as Australian home owners owe more on their home than its actual value
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