Australians are experiencing high levels of mortgage stress, and they're set to worsen, according to ME’s 13th 'Household financial comfort report'.

More than half of households - 56 per cent - said they are contributing more than 30 per cent of their disposable household income towards rent or paying off their mortgage. 

Consulting Economist for ME Bank, Jeff Oughton, told SCHWARTZWILLIAMS, "This is a common indicator of financial stress for households paying off their homes – especially lower income households.

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"That said, 14 per cent are paying more than half their disposable income on home mortgage payments," he said.

A total of 72 per cent of renters said they are spending 30 per cent or more of their disposable income on rent, and 46 per cent of those paying off a mortgage are putting 30 per cent or more of their disposable income towards their mortgage repayments.

"Not surprisingly, the proportion of households who ‘worried about their household’s level of debt over the last month’ increased by 1 point to 38 per cent in December 2017," said Oughton. This figure was as high as 51 per cent for mortgage holders.  

Oughton said, "Seven per cent of households reported they could not always pay their mortgage on time during the past year, and 7 per cent could not pay their rent on time."

Oughton cautioned that higher interest rates are likely to worsen already high levels of financial stress.
 
“Mortgage defaults may escalate if interest rates increase, particularly among vulnerable low-income households already dealing with the rising cost of necessities,” he said. 

Oughton said, "The majority of households are coping well with debt servicing burdens due to relatively low loan rates, job gains and a sustained rise in house prices. However, job losses, underemployment and falling property prices present challenges to households in some regions.

High debt levels make sense in 'good times', but 'bad times' may arise unexpectedly

"Furthermore, some households have debt levels that make sense in ‘good times’, but, they haven’t allowed for the fact that ‘bad’ times may arise unexpectedly. Some households are close to their maximum risk position, not considering that loan rates will inevitably rise significantly from record lows."

Oughton said wages growth and sound financial management were the keys to alleviating some of the financial pressures on households.

"Australian households want higher disposable incomes to ensure that they can keep up with the rising cost of living and regular monthly expenses," he said.

He also advised households to "build some cash savings for unexpected emergencies". 

What happens if rates move higher?

Oughton said he expects rates to begin moving higher within the next two years.

"While the future path of interest rates is uncertain, the RBA is likely to remove its highly accommodating financial policy and raise official cash rates over the next couple of years. Indeed, medium to long term rates have already begun to rise and increase bank loan funding costs, and financial markets also expect the RBA to start putting up cash rates in later 2018.

Oughton said it's quite likely that mortgage defaults will rise if rates begin to move higher.

"ME’s Household Financial Comfort Report shows 7% of households were not able to pay their mortgage on time during the past year and a similar proportion do not expect to be able to meet minimum payments on their mortgages over the next 6-12 months. A further 31% anticipate to just manage to make minimum payments," he said.

"If interest rates rise significantly and unexpectedly, mortgage defaults would increase," he said. 

"Those hardest hit would be low-income households already dealing with the rising cost of necessities with little cash savings or negative, if any, equity in their homes.

"Some regions with excessive supply of new dwellings and households with excessive debt may also experience significant house price falls and increased defaults from sustained higher loan rates."

How to avoid financial stress

ME money expert Matt Read said there are some simple ways households can better manage their finances and avoid mortgage stress.

"Investigate what you spend your money on and identify if anything could be cut out – this could be anything from coffee and restaurant meals to dry cleaning and hair colouring," he said.

Read recommends ASIC’s TrackMySPEND app as a good way to keep track of personal expenses. 

"Question what you buy and where you shop – could you be getting a better deal? Set a budget on costs and stick to it," he said.

Read also suggested making sure your utility provider is delivering competitive prices, negotiating a better home loan rate, or even switching lenders if that will deliver a saving.

Negotiating your home loan rate or switching lenders could save, on average, up to $130 per month, $1,560 a year, or $46,000 over the life of the loan, according to ME.

Read ME Bank's 'Household financial comfort report' in full.

Read more about financial stress:

Mortgage stress climbing, affluent borrowers most at risk

Borrowers well placed to withstand modest rises in interest rates

One in five Australian households will struggle if interest rates rise 0.5%