Interest rates increased last week – is it time to refinance?

Technically speaking, if more than 30 percent of your pre-tax income goes towards paying your mortgage, you meet the common definition for being ‘mortgage-stressed’.

The number of households at all levels of stress rose by 6,000 in August to reach close to 1 million stressed households, approx 30.5% of owner occupied borrowing households according to Digital Finance Analytics*.

The lift in mortgage rates, dropping house prices (resulting in negative equity in properties) as well as the forced transition of interest-only mortgage holders to more expensive principal and interest loans are exerting pressure on borrowers comments Su-Lin Tan of the Financial Review.

Now is the time to consider your options, including speaking to your Enrizen advisor to see if refinancing is the right choice for you.

For those not yet in the property market, here is how you can avoid getting into mortgage stress

We recently had a conversation with Jess and Hamish, who are successful thirty-something professionals with a solid income and a healthy deposit. They were house hunting and itching to get into the elusive property market.

Hamish is the long term thinker of the couple and he did their household sums, entering their information into several bank online calculators to determine their borrowing capacity.

They entered:

The highest amount suggested by one of these calculators was around $976,000 with monthly repayments of $4,650 over 30 years. Based on their current combined income this would take up 29.3% of their pre-tax income.

It’s natural to want the best home affordable. “We’re on good money, our salaries will only increase, we figured we could afford it,” Hamish said during our first meeting.

“But it’s a lot of money to owe,” Jess added. Jess is the more impulsive of the couple, and was genuinely shocked as she started to understand what other costs might be involved. “A larger house costs more to maintain and furnish; plus higher council rates.”

When inflation is low and wage growth is minimal, households with large mortgages could be in real strife when costs of living go up or as indicated last week by the big banks, the interest rates rise.

Online calculators generally use limited information to give applicants an idea of what might be available to them. Supporting a mortgage up to thirty years requires more detailed consideration than credit card limits and pre-tax earnings.

The banks’ calculations would take Hamish and Jess perilously close to the 30% threshold. Increased living expenses, or small interest rate rises would tip them into the danger zone.

Enrizen advisors showed Jess and Hamish the independent mortgage calculator on the ASIC MoneySmart website. By working on the couple’s AFTER tax income of $140,536** and applying 25% of this to calculate monthly repayments of $3,000, MoneySmart’s calculator returned a more realistic estimate of $629,000***.

Though disappointed, they pragmatically decided to continue growing their deposit and we were able to help them plan their finances through our fixed, fun and future theory of money. Then we spoke about how to de-risk their investment by protecting their income (their most valuable asset).

Unfortunately, too many people are in over their heads. If you’re experiencing mortgage-stress or you’re losing sleep worrying about the recent interest rate rise, speak with your Enrizen adviser about a strategy to relieve the pressure whether it be refinancing or a focused plan to reduce debt.

* DFA’s analysis using 52,000 household surveys, public data from the Reserve Bank, APRA and ABS, as well as private data from lenders and mortgage aggregators.

** $100,000 + $90,000pa = $190,000pa combined income after tax and Medicare levy.

*** Calculated at 3.99% interest over 30 years, not including fees or charges.

Technically speaking, if more than 30 percent of your pre-tax income goes towards paying your mortgage, you meet the common definition for being ‘mortgage-stressed’.