With a growing number of Western Australian households suffering from mortgage stress, it’s a good idea for would-be home buyers to test themselves on how ready they are to take on a large debt. There are a number of key practical steps people, particularly young borrowers, can take to work out if they’re “mortgage ready”.
While bank lending practices have gone through some changes following the recent Banking Royal Commission, studies continue to show rising rates of mortgage stress.
Independent research by Digital Finance Analytics (DFA) recently found more than one million households, or 31.6 per cent of owner-occupied dwellings, across Australia struggle with mortgage stress, while Standard and Poors reported in August that Western Australia had the greatest percentage of households more than 30 days behind on their mortgage payments.
To protect themselves as much as possible from mortgage stress, potential borrowers should do some ‘training’ based on their own spending habits and cash flow rather than relying on a loan calculator to work out what level of mortgage they can comfortably afford.
The key steps to take are:
- Don’t get carried away with pre- approval – If, for example, a bank will loan you up to $500,000 don’t let that dictate how much you are going to spend. First work out what type of property you need/ want, where you want to live and what you can comfortably afford. Let those factors determine what type of house you purchase not your pre-approval, and hopefully you are under your pre-approval amount. If the type of house you want to purchase is over your bank pre-approval, you may need to re-evaluate the type of house you would like.
- Experience life as if you had a loan – As part of your research, work out what the repayments are on the loan you want to get and then actually set aside that amount into a different savings account. See if you can meet all your living costs/expenses/spending money, plus savings, from what’s left over. You could even put the money you’ve quarantined towards your deposit on a home.
- The buffer zone – As part of the loan repayment test, have a look to see if you have room for additional savings. This will give you a buffer for interest rate rises and any other unplanned events. The last thing you want is to be living pay cheque to pay cheque, without room to move to accommodate for unexpected expenses.
- Mortgage Insurance is not always the answer – There is a great misunderstanding that mortgage insurance protects the loan applicant. Mortgage insurance protects the bank if you default on the loan, not you. Weigh up whether it’s better to save a bigger deposit to avoid the insurance costs or even reassess the house you are buying.
Buying a home is a big decision and involves a lot of emotion but it’s important to do as much financial preparation as possible to avoid over-extending ourselves. Defaulting on a loan can have lifelong consequences.
This article was authored by Jess Lewis, Financial Adviser, HLB Wealth, Perth. If you would like further information on this topic, please email Jess Lewis at HLB Wealth in Perth.
This article first appeared in the Summer 2019/20 issue of HLB Mann Judd’s Client Alert.
Jess Lewis and HLB Wealth Pty Ltd are Corporate Authorised Representatives of Paragem Pty Ltd ABN 16 108 571 875, Australian Financial Services License 297276, Level 15, 115 Pitt St, Sydney NSW 2000.