Cry for help – 1 million households – mortgage stress

mortgage stress

I don’t want this post to be doom & gloom, there’s enough of that out there at the moment. Instead I simply wanted to toss around a couple of ideas.

After reading this article mortgage stress may affect 1 million households it looks like neither the Reserve Bank, the Lending institutions nor the Australian government seem to have any fresh ideas that may stop the inevitable.

Here’s a couple of thoughts that might be worth considering.

The biggest problem seems to be that the lending criteria changed from the days when only 30% of your gross income was allowed to be allocated towards mortgage repayments. Until we get back to those sorts of levels there will be no disposable income to help run the other parts of our economy.

Mortgage stress is a huge thing, but of even greater concern is that fact that in many cases over 50% of gross income is going to the mortgage payments. Take out the income tax & every day household running costs & there is nothing left.

Unfortunately, in most cases the bills keep mounting & the only way to pay those bills is via a credit card. Many people are maxed out on their credit card & to survive they have no alternative but to get another credit card & so on.

Unfortunately, all the concepts rely on the banks & the government in some way or another but at least this first idea is something you may consider straight away.

1. Borders or Lodgers – Now that there are less investors buying & even more people selling up & opting to rent the rental crisis is only going to get worse. Some people are taking in borders or lodgers. This may help with the repayments, but be very careful with your selection process. Also, its important to be aware that the government may interpret that you are receiving an income from that part of your home & it may come under scrutiny which could have capital gains tax implications. It could be deemed that a portion of the home may become subject to GST just like it would if you ran a business out of a part of your home. Plus there could be income tax implications. Please do your homework & seek out some professional advice on this before you jump straight in.

I think the government should relax these CGT laws under these circumstances, but I doubt that they will.

2. Effective first home buyer & refinance products:- In a previous article I suggested that the banks should offer longer term loans for Gen Y. Why don’t the banks extend the term on their loans but have a maximum of say 35% o gross income allocated to mortgage payments. By including the 35% maximum criteria the chances of a huge increase in property prices should be diffused. The prospect of Gen Y having to borrow even more money to enter the market is the last thing I would want to see.

Most people may be horrified to know that over in Japan they have 100 year home loans. However, in reality having a longer term doesn’t mean that you necessarily have to take that long to pay off the loan. A large percentage of 25 – 30 year mortgages are paid off within 10 – 15 years & if you end up having some disposable income you can always put it towards paying off the loan.

3. If it’s possible maybe consider renting your house out, rather than selling it & moving back in with the folks for a little while. The government currently has a policy that you can rent your house out for 6 years & not be subject to capital gains tax, but at the moment this only seems to be available to people who have had interstate or overseas job transfers, attending to sick relative or have gone on an extended holiday. Here’s the information on the Australian Taxation Office site. ATO link

If the government could open up this criteria so that their ‘Working Families” could take up this option for a year or two, it may be just the breather they need to be able to help get back on their feet.

Bad debts, bankruptcy, mortgage stress, banks with outstanding debts, restrictive lending criteria & mortgage insurance companies feeling the pinch – none of this is going to be any good for any of us & lets face it most of these people having to sell up will have recieved free stamp duty & the first home buyers grant to help get them into their home. If they sell up, how are they ever going to be able to save for the deposit & the stamp duty that they will need to enter the real estate market a second time around ?

I can see a lot of hope for our economy, if we can just get back to having some disposable income again so we can all get on & live a little rather than having 1 million households giving the majority of their income to the banks via mortgages & credit card interest.