Australia has had years of low interest rates. It follows that mortgagees should have been able to pay off their home loans faster. But it hasn’t happened.
In fact, our soaring mortgages are a key factor behind Australia having the second highest levels of household debt (mortgage debt combined with consumer debt) in the world, after Switzerland according to statistics from the Bank of International Settlements. And it begs the question, why?
Larger loans not larger wages
The key driver is that as the size of our mortgages has increased, thanks to the high cost of housing, wages growth hasn’t kept pace. It means that it’s much harder to pay back a home loan than it was in the past.
The graph below shows that someone who bought a house in 1990 would on average still be spending 21% of their disposable income on mortgage repayments after 15 years of paying off the mortgage. By 2003 this had risen to 27%. Today that figure is a little over 30%
In addition, the buffers in mortgage offset accounts are surprisingly low with more than 50 per cent of loans having less than a one-year buffer, and around 26 per cent having less than one month, which effectively mean they aren’t ahead on repayments.
This situation leaves Australians quite vulnerable to increases in interest rates because we are so highly leveraged, and it is something governments and investors need to be very wary of.
Most at risk
Young families (with parents in the 35 to 44 year old age range) are the most indebted cohort, followed by ‘string betting professionals’, white collar workers aged between 45 and 54 who rely on bonuses and negative gearing to make ends meet, making them particularly vulnerable to an economic downturn.
The next most indebted group are the ‘young pretenders’, who are highly leveraged and often helped out by the bank of mum and dad.
As this chart shows, all three groups have higher debt levels than they did 15 years ago. And that’s worrying reading in an economy where interest rates are at record lows.
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