Housing debt at all-time high: How to future-proof your mortgage

Owner-occupier debt is on the rise, according to the latest from APRA.

The proportion of owner-occupier housing debt in Australia has soared from 80.6% in 2004 to 89.3%, and despite some capital cities showing signs of entering a correction phase, the trend of high owner-occupier debt is set to continue.

finder.com.au’s analysis of data from APRA shows that owner-occupier housing debt is at a record high of 89.3% which represents 136% growth over the 11 year period.

In dollar terms, the amount of outstanding owner-occupier housing debt has jumped from $20,802 to $49,165 from December 2004 to December 2015.

Despite the significant rise in housing debt, credit card and personal loan debt – comprising revolving credit, credit card liabilities and other personal term loans – has remained relatively stable.

The amount of credit card debt has risen by just 18% from $4,999 to $5,885 from December 2004 to December 2015.

What’s causing so much debt?

While Australians seem to be comfortable with taking on a higher level of debt (compared to previous generations with higher saving rates), the high debt level is largely due to the appreciation of Australian property over the past decade.

The accelerated price growth of capital city housing markets like Sydney and Melbourne during this time has subsequently pushed up mortgage sizes, leaving Australians with no choice but to borrow more.

The average national home loan size jumped from $189,300 in January 2004 to $372,400 in January 2016 which represents an increase of nearly 100%. Interestingly, this has grown faster than inflation, which would have increased an asset by only about 34% in the same period.

As a result, many Australians risk mortgage stress. Research from the Adelaide Bank/Real Estate Institute of Australia (REIA)’s Affordability Report showed an overall decline in housing affordability based on the proportion of income required to service mortgage repayments.

Despite this, and while Australian property has previously been "overvalued", it appears that some capital markets could be showing early signs of slowing down.

Price growth has softened in some capital markets – notably in Sydney and Melbourne where the median house price fell by 2.5% and 0.1% respectively from the December 2014 to December 2015 quarter. As a result, you should take provisions to protect yourself if your property market enters a correction or stability phase.

How can I manage my mortgage debt?

A fall in property price could have a profound impact on your ability to build up equity and to service your debt, so here are some ways that you can structure your mortgage to future-proof your financial health:

1. Borrow less

A decrease in the amount you borrow is a simple way to minimise your risk. To help you understand your borrowing power (that is, how much you can afford to borrow), and your serviceability potential, speak to a licensed mortgage broker. A broker will review your financial position and recommend suitable products to you based on your borrowing needs.

You may also want to sit down with an accountant and a financial planner so you can understand your cash flow and to ensure that you don’t overcapitalise.

2. Repayment frequency

Many borrowers make their repayments each month by default, but re-thinking your repayment frequency can make a big difference to your debt position. That is, opting for a fortnightly or weekly repayment schedule can greatly reduce the amount of interest you pay over the lifetime of your loan, and it will also shrink your loan term by years.

To illustrate, if you took out a home loan of $375,000 at 5.5% interest over 30 years, and you made fortnightly repayments (as opposed to monthly), you would save $77,819.15 in interest, and you should reduce your loan term by five years and one month. If you were in a position to switch to weekly repayments, you could save $78,182.78 and reduce your loan term by five years and two months.

Use our bi-monthly repayment calculator to see for yourself.

3. Extra repayments

The ability to make additional repayments without penalty is a useful home loan feature to keep on your comparison radar. Making extra repayments towards your mortgage is a good way to fast-track your way out of debt.

Assuming the above home loan, if you put an extra $150 towards your loan each month (and if you started the extra monthly repayments at year five), you would save a total of $43,234.20 in interest, and you would shrink your loan term by three years and three months.

4. Offset account

Similar to a transaction account, a linked offset account can minimise the interest payable on your home loan by the amount of funds held in the account.

For instance, if you held $5,000 in an offset account (and the offset began at year five), you would pocket an extra $14,350.38 and you would shorten your loan term by seven months.

Check out our mortgage offset calculator to see how much you could save.

5. Split loan

Another way to reduce your risk is to take advantage of a split loan facility, which enables you to allocate a portion of your loan amount to attract a variable rate and another portion to attract a fixed rate.

In the event of an interest rate rise, you are partially protected from rising repayments. This gives you the flexibility to enjoy the security of a fixed rate and the benefit of a variable rate.

6. Consider refinancing

Many Australians are taking advantage of the competitive home loan market through the refinancing process. If you’re after a better rate, then consider refinancing with your current lender. Simply ask your lender for a more competitive rate and use your customer loyalty or your repayment history as leverage.

Alternatively, you can refinance by switching to a new lender if you’d like new features for your home loan. However, you need to carefully review the switching costs involved before making a move. Use our refinancing comparison table to see how much you could save by switching to one of the home loans listed in the table.