The median price for a Sydney unit broke the $400,000 barrier in the September quarter, so it’s little wonder that Sydneysiders struggle to get a foot into the property market.
According to figures from Australian Property Monitors the median price for a Sydney unit rose 9.8 per cent from $365,121 to $400,819. Its closest rivals are Canberra at $381,345, Melbourne at $368,138 and Perth $361,180.
Much of the latest rise came from the rush of first home owners hoping to enjoy the full largesse of the first home owners bonus (it was reduced from $7000 to $3500 on September 30 and will be phased out completely on December 31, leaving just the original $7000 grant).
It seems likely many first home owners will be the ones to feel mortgage stress as rates continue their upward climb – and many of those will be in Sydney. This is because they have probably not had the chance yet to build up equity in their home and may not have a sufficient buffer to cope with the rate rises that are expected to take place over then next year. Forecasts are expecting the official interest rate to be around 4.5 per cent by mid 2010 compared with its current rate of 3.5 per cent.
Such an outlook underlines the importance of having a buffer of up to 2 per cent when you take out a home loan to help you handle interest rate rises that come your way.
Ahead of the two 0.25 per cent rate rises in October and November, the Real Estate Institute of Australia’s figures on affordability showed that in NSW 31.1 per cent of household income was needed to meet loan repayments in the June quarter versus just 27.3 per cent in Victoria and a paltry 17.3 per cent in the ACT.
Fujitsu issues a study Anatomy of Australian Mortgage Stress and its latest edition shows that the number of households experiencing mortgage stress in October this year rose by 1.4 per cent. But even at 530,000 households, this figure is well below the 900,000 households that were suffering back in August 2008.
Nevertheless Fujitsu believes that mortgage stress is rising and will affect 890,000 households by December 2010
“Concerns about future rises in interest rates came through as a significant cause of potential mortgage stress, with nearly one third of households concerned about interest rates potentially causing payment problems,” says the Fujitsu report. “Those who had purchased within the last 12 months were particularly worried, with half of these first-time buyers potentially exposed.”
The survey differentiates between those suffering mild stress and those suffering severe stress. Mild stress is where households maintain repayments but by reprioritising expenditure, borrowing more on loans or cards and refinancing, severe stress is where households have fallen behind in their repayments and are trying to sell or refinance or are being foreclosed.
So what can you do to minimise your stress if you are a home owner? Before you do anything look at our budget. What are your outgoings? Is there room for some belt tightening?
Another thing you should look at is whether there is any value in refinancing your loan. A recent study by Infochoice found that if all customers of the main banks switched to the lowest priced mortgage available then they would make an average annual saving of $5.4 billion – that’s $3800 on an individual’s banking costs each year.
The best way to work out whether you’d be better refinancing is to see a mortgage broker who can provide you with a range of home loans to suit your individual needs. It’s usually a free service to check so it makes sense to consult with a professional.
If you do decide to refinance it’s important to check the exit fees on your current loan as these could be quite prohibitive, particularly if you are in the early part of your loan. Most loans can be expensive to exit in the first five years.
It might be that you can still stay with your same lender and just take out a different product. A basic variable loan, for instance, could be about 0.7 per cent lower than a standard variable. And to be honest, if you are just in the early days of having a mortgage it’s unlikely you will have built up sufficient equity in your mortgage to take advantage of such things as redraw facilities anyway.
Switching all or part of your loan to a fixed rate to ensure certainty of repayments could be considered as a way to reduce mortgage stress, but it’s the stress that it’s reducing in the current climate rather than the mortgage! The difference between the current fixed term rate and the current variable may make fixing quite unattractive. In addition, if you are worried at all about the security of your employment then locking yourself into a fixed loan may not be the way to go, as harsh penalties could apply if you need to get out of your loan early. With a variable you should have more room to manoeuvre. But it’s important you talk to your lender if you are having problems and try and work out a solution. Burying your head in the sand is not going to fix anything.
- Look at refinancing
- Check exit fees
- Look at switching from a standard to a basic variable home loan
- Reappraise your budget