Many Australians are experiencing rising household debt and this is having an impact on their happiness and that of their families. Mortgage repayments make up a significant proportion of household debt in Australia. But what happens if the value of the home drops below the mortgage debt?
There are options available to people who find that over time they can no longer afford their mortgage repayments, due to changes in personal circumstances or a change in the value of their home. Here we explain your options…..but first here are some facts and figures:
In Australia, the gross national debt of households, governments and business has almost doubled since 2005. Consumer debt is now at nearly $1.6 trillion and business debt at about $800 billion.
The Reserve Bank of Australia (RBA) Financial Stability Review (FSR) contains data on household debt levels and preferences for servicing that debt. The March 2013 FSR shows that overall debt levels, at 148% of disposable incomes, remain near historical highs. While lower interest rates in recent years have made this debt easier to service, an increasing level of household income is being used to service debt.
The RBA’s Total Household Debt to Disposable Income ratio shows total household debt (usually mortgage repayments, credit cards, personal and car loans) as a percentage of annual income after tax for Australian households.
According to the RBA’s records, in 1977, households had average debt at about one-third of a yearly disposable income. By 1990, that figure had risen to nearly half a yearly disposable income and today total household debt in Australia is almost one-and-a-half times annual disposable income.
In data released by the RBA in May 2013, while the level of household debt stopped growing during the global financial crisis, the total value of debt in households has only marginally reduced since a high in 2007. In general, household debt is currently close to 150% of household annual income. This means that although household debts are not growing, the ratio of debt to income is not changing either.
National statistics suggest that the approaching retirement of a large section of the community (the Baby Boomers) and the recent global financial crises have impacted on Australians’ acceptance of debt levels. In recent times, more Australians have begun to live within their means and savings levels have increased and this is a positive sign.
However with house prices as they have been to date it is not surprising that for many, mortgage repayments are the most significant proportion of debt, currently comprising 133% of annual disposable income.
The RBA has highlighted that the increase in household debt has been accompanied by an increase in financial assets held by households. Therefore despite the large debt holdings there is the capacity to support this debt. While the total wealth of households has risen in recent times this is mainly related to the financial assets, mostly real estate, held by households gaining in value.
Lenders recommend that mortgage repayments should be no more than 35% of the gross income. This should leave enough to cover living costs and a buffer, should individual circumstances change. But many households have mortgage repayments higher than recommended. High debt levels make a household more sensitive to changes in individual and economic circumstances, such as a reduction in working hours or an increase in interest rates.
With current household debts levels so high, it is possible that many will find themselves in difficulty with changes in economic conditions. Moreover, if the increase in financial assets held by households has been largely driven by the increase in house prices over the past decade or so, the value of such assets will be significantly reduced if house prices go down. Additionally, the high level of mortgage debt leaves households more vulnerable should unemployment or underemployment occur.
The International Monetary Fund prepared a report that warned that in the wake of the ‘Great Recession’ in 2009 if high levels of debt are followed by a downturn in house prices, this will result in an even greater reduction in economic growth and therefore an increase in unemployment. Such a downturn in house prices has already been experienced in the US, Ireland and the UK.
While Australian real estate prices have generally been in the doldrums for the last few years, some economists are reporting that house prices will fall in the later part of 2013 and 2014. This may leave a growing number of households paying large mortgage repayments on an asset that is diminishing in value.
The first course of action for people unable to pay their mortgage would likely be to sell the home to pay off the debt. But what if the value of the home is reduced and the sale will not cover the debts? If this is you, then obviously talking to your credit provider is a first step.
However, if you find yourself in the situation where you are unable to service your debt, there are a number of options available to address the situation; all of which have consequences.
When you find yourself experiencing overwhelming or unmanageable debt, it is worth talking to a debt administrator about the options that are suitable to your circumstances. Debt Agreement Solutions have helped thousands of Australian get their lives back from debt, and will help you to do the same.
For more information go to Debt Agreement Solutions or call on 1300 653 962