Nearly 1 in 4 Aussie households (23%) have only one person living there, and that number is expected to grow (AIFS). In fact, the average number of people living in one household is just 2.6, so when one person leaves, it can make a significant impact to a household’s income and ability to repay their mortgage. More than 30% of all households are expected to be “single occupants” by 2020 (AIFS).
We’re taking on more debt than ever before. The average home loan has grown 18%, from $298,600 in 2012 to $352,100 in 2015 (ABS). But the average full-time wage hasn’t grown enough to meet that increase in debt. The average wage in 2015 was $80,282, showing growth of just 7.6% from 2012 (ABS).
According to Mortgage Choice, nearly 1 in 4 Australians contribute more than 40% of their income to meeting the monthly repayments on their mortgage, although thankfully this is less than the 2 in 5 Aussies who were struggling in 2011.
For those living under such high levels of mortgage stress, interest rate rises can have a significant impact on affording the monthly repayments on a home loan. Moody Analyst Natsumi Matsuda says the risk of default increases exponentially as a mortgage becomes less affordable relative to household income.
So at what point does a mortgage become so unaffordable that the owner must default on their repayments? We looked at the top three causes of default discussed by leading mortgage broker Mortgage Choice in a recent press meeting.
Reason 1: Divorce or separation
Divorce or relationship breakdown with a de facto partner is the number one cause for mortgage default, according to Mortgage Choice. A divorce can be gravely expensive, including thousands of dollars’ worth of legal fees involved in the process, potentially exit fees upon closing joint accounts, taking on half of any joint debts, liability for any bills in your name that were unpaid, and taking on expenses like insurance that may previously have been covered by a partner.
A divorced person often faces capital gains tax at a time when they can least afford it, simply because the court has ordered that assets be sold so that they can divide the proceeds of sale in half.
Children make a divorce even more expensive, and can further increase the risk of mortgage default. Alimony or family support payments can make a huge dint in the income of the spouse who does not have custody of the children. Meanwhile, the spouse who has custody faces the cost of providing four walls and an education for those children on just their own income. Even things like applying for single parent support benefits from Centrelink take time to get approved.
Surviving financially after a divorce takes a courageous amount of effort and will almost certainly mean getting professional financial advice specific to the person’s situation. The temptation is to make huge life decisions in a hurry, such as moving far away, going on an impulsive holiday, or even buying a new pet to fill the void.
A divorced person can minimise the shock to their finances by focussing on the “four walls” they really need: food, shelter and utilities, clothing, and transportation to and from work. There are a lot of urgent decisions that must be made during or immediately after a divorce, but every other change or decision in life should be put on hold until finances have stabilised.
The ASIC MoneySmart website has some practical information about how to get your finances in order after a divorce or separation.
Reason 2: Illness or involuntary unemployment
Involuntary unemployment or unexpected illness – basically anything that stops you working unexpectedly – is the next most common cause of mortgage default, according to Mortgage Choice.
Mortgage defaults are higher in Western Australia already, a region that was largely dependent on the mining boom.
The good news is that in spite of the mining boom coming to an end, Australia’s unemployment rate is currently remaining relatively stable year on year. It was 6.0% in January 2016, down from 6.3% in January 2015 – although up from 5.8% in December 2015.
Digital Finance Analytics principal Martin North says that the risk of default is not caused by having a lower income, since this usually means taking out a smaller loan with a more conservation loan-to-valuation ratio. Rather, the postcodes most at risk of default are those in regional areas where employees will struggle to find another job if they are let go.
The ASIC MoneySmart website has some practical information about how to get your finances in order after losing your job or being retrenched or made redundant.
Reason 3: A death in the family
The life-changing grief that comes from a death in the family is often accompanied by a significant financial burden. This usually includes the costs of a funeral service and burial or cremation, and it can mean the cost of moving to a single income household if the person who passed away was a spouse or partner.
Avoiding this often unexpected financial burden is one of the many reasons why we recommend you compare funeral insurance on our website and choose a policy that offers outstanding value. Also vitally important is ensuring that you have sufficient life insurance in place for both partners.
The ASIC MoneySmart website has some practical information about how to get your finances in order after the death of a spouse or partner.
Can you insure yourself against defaulting on your mortgage?
You can’t insure yourself against interest rate rises (unless you’ve got a fixed rate home loan), but you can insure yourself against default to a certain extent.
First Home Buyers are required to get Mortgage Protection Insurance, a.k.a. Lender’s Insurance, to protect the bank against a loss if you do default on a monthly repayment. But you don’t have to be a First Home Buyer to get this type of insurance.
Income Protection Insurance is also vital, because it covers you in case you get seriously sick or injured and can’t work for a period of time. As we’ve mentioned, Life Insurance and Funeral Insurance are also vital in protecting against an unexpected financial burden if you or your loved one passes away. You can compare policies for each of these types of insurance on our website to find a policy that provides outstanding value.
If you are in mortgage stress and you do not already have income protection insurance or life insurance, don’t freak out. Check if you have a level of income protection insurance included in your superannuation policy, as this is a very common arrangement. It will not cover you for as much, but it may give you a bit of breathing space to work out where to get more income from until you’re back at work.
The most important thing you need to do if you are in mortgage stress is to talk to your lender. If you tell your lender you are in Financial Hardship, which means you’re having trouble meeting your monthly repayments, they are obligated by law to assist you in setting up an affordable repayment plan.
If your lender is already taking legal action, get legal advice immediately so that you know what your options are. You can get free legal advice from the centres listed on the MoneySmart website.