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6 July, 2023
The bleakest mortgage affordability Australia has seen in over three decades
First Financial Team
Earlier this year, mortgage affordability reached its lowest point in over three decades. Australia is home to around 10.3 million properties and an estimated six million have mortgages against them. Consequently, a significant number of people, including some of our clients at First Financial, are experiencing pressure servicing their mortgage, or mortgages.
In terms of the economy, this will inevitably impact other areas, including discretionary spending. So, let’s talk about mortgage affordability in Australia right now.
What is mortgage affordability?
Mortgage affordability relates to the percentage of a household’s income dedicated to fulfilling mortgage repayment obligations. As the percentage increases, servicing or paying off the mortgage becomes progressively more difficult.
In Melbourne, the average household is spending 45% of their after tax income on their mortgage. In Sydney, it’s over 61%. Amid the increasing cost of living, attributing such a large portion of income to a single living expense doesn’t leave much room for anything else. It’s no surprise that mortgage stress is on the rise.
The repercussions extend beyond individual households and into the economy as a whole. Mortgage stress leads to a decrease in discretionary spending, which has a cascading effect on employment levels and economic growth. That’s why addressing the issue isn’t just important for those of us who have mortgages – it’s vital for the economy.
The impact of rate hikes and rising housing prices
It doesn’t seem that long ago lenders were offering interest rates as low as 1.99% and mortgage repayments were not so unmanageable. It begs the question: what happened?
The answer lies in the convergence of the swiftest interest rate hikes witnessed in a generation, coupled with the stagnation of wages. When you combine this with current record house prices, you get an unfortunate cocktail of poor mortgage affordability.
It’s unsettling to realise that due to soaring house prices, the current mortgage affordability percentages are actually higher than those families faced in the late 80s and early 90s when interest rates hit 15 and 16%.
The 28% rule
Ideally, the percentage of your gross monthly income required to service your mortgage shouldn’t exceed 28%. Some financial experts consider 30% as the threshold where you risk mortgage stress.
While there are individuals who can afford to allocate more than 30%, this is a sensible goal post. Remember, interest rates fluctuate with time, as we have observed over recent months and years. Being able to service a mortgage at 30% now doesn’t necessarily mean being able to do so in the future if interest rates continue to rise.
When evaluating total debt, experts generally recommend allocating no more than 36% of monthly income to debt repayment. This benchmark is a key factor that most lenders take into account when considering any type of loan.
Strategies for navigating the current crisis
Despite challenging economic times, you can thrive financially with a careful, calculated plan.
When purchasing a home or investment property, consider smaller homes or apartments and regional areas for better pricing. Partner with a reliable, experienced broker to ensure you are getting the best deal.
Regardless of income level, in uncertain economic times it’s important to budget diligently, reduce unnecessary expenditure, save where you can and pay off debts as quickly as possible.
Finally, speak with your financial advisor about investment options and financial planning strategies.
Talk to the experts
First Financial is your trusted partner in overcoming the challenges of the current mortgage affordability landscape in Australia.
Our comprehensive range of financial services includes retirement planning, investment management and personalised financial planning to empower you to retire on your terms.
Contact us to speak with one of our experienced, friendly financial advisors today.
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