Over-optimism about the ability to pay back a large mortgage can lead to mortgage stress, which can destroy a person’s property dream. Mortgage stress is part of the property cycle that leads to higher rental demand and more forced sales of property. http://www.focuspropertymanagement.com.au

1. Mortgage Stress: the Lurking Demon in your Property Dream
Most people talk glibly about the property boom and bust cycle without considering the implications for
their own lives and businesses. Australia’s property boom has driven property values to levels amongst
the highest in the world. On the back of a strong economy, low unemployment, a resources boom,
generous first home owners’ grants and low mortgage rates, Martin North of Digital Finance Analytics
says people have been tempted to “mortgage to the hilt”.
It’s very tempting to extending oneself during a property boom to take out the largest mortgage
possible, on the understanding that the value of the property will continue to rise, increasing equity in
the property and thus overall wealth. But small changes in circumstances can lead to devastating
consequences for over-extended mortgagees. The term for this is ‘severe mortgage stress’: it means the
borrower cannot meet the required monthly payments, is obliged to search for refinancing and may
even be under pressure to sell. Finding refinancing under these circumstances is often very difficult, and
an urgent or forced sale rarely achieves the best return on a property investment.
Mortgage stress can be further increased by the offer of generous mortgages, which require smaller
deposits (called higher LVR loans in the industry – higher Loan-to-Value Ratio). While the obvious result
is that a mortgagee’s repayments increase, the other danger is that a relatively small decline in property
prices may mean the mortgagee now has negative equity in the property; that is, the property is now
worth less than the value of the mortgage.
Mortgage lenders, under pressure to increase their number of home loan customers, are finding more
ways to appeal to borrowers, whether first-time or refinancing customers. Customers should be warned
that attractive terms for setting up or transferring a loan do not necessarily translate to ongoing
attractive terms for the duration of the mortgage.
The size of a mortgagee’s loan should not be determined by the amount the financial institution is
prepared to lend. Prospective mortgagees Property Management Surry Hills should be realistic about
their income and ongoing cost of living, as well as having a strong plan for how a change in
circumstances (loss of job, sickness, reduction in earning capacity or family crisis) might affect their
ability to maintain mortgage repayments. As general living costs increase, experts predict that more
people will experience mortgage stress.
For some mortgagees, the stress of too high a mortgage will result in the sale of their home and a return
to the rental market. This is a natural cycle in the property market and represents an opportunity for
owners of rental properties as demand for rental properties increases. It also represents an opportunity
for astute investors, for whom property ‘bargains’ may become available as mortgagees and lenders
move to sell quickly.
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