Many first-home buyers are entering the property market prematurely, without proper financial backing. They are therefore at higher risk of defaulting on their home loans. This tendency has no doubt been compounded by the implementation of new Government schemes designed to help first home buyers get into the property market with as little as a 5% deposit. Consequently, as a recent report from consultancy LF Economic emphasises, many home buyers' parents end up bearing most of the financial brunt to help their children out of this situation. The report goes on to describe how the property climate has transformed over time, with people nowadays paying bigger deposits and larger loans. As a result, young homeowners are sacrificing a large percentage of their income to finance their mortgages and simultaneously lack sufficient savings. New homeowners who are dependent on their parents' financial backing incur much risk on their behalf, leaving them susceptible to monetary problems when they ought to be preparing for retirement if the children end up defaulting. Let's break down the factors and demographics at play in the property market and find out more.
The Profiles of High Risk Borrowers
Gen-Y Borrowing Risk Profile
Born in the 1980s, right through to the 2000s. They generally have poor credit ratings due to over-reliance on debt-based financing. While being a financially ambitious species, they live in a world of instant gratification. As a result, they want their desires fulfilled immediately. Gen Y also makes up a large proportion of the "boomerang generation" based on their tendency to move out of home for some time, only to move back in with their parents due to economic conditions. Many children in this generation have never even moved out of home in the first place. Thus, this generation is predicted to struggle to save up enough to afford a deposit to get into the property market in the first place.
Gen-X Borrowing Risk Profile
Gen X (1960's to '80s) are often at risk of default, as they are responsible for families of their own, and many are still financing their first home loans. As a result of balancing their multiple commitments to raise a family, owning cars, and owning property, many struggle to meet daily financial demands. Many were lured into the property market at a time of low interest rates and now just manage to make ends meet. When interest rates invariably rise, they can find themselves unable to meet their mortgage repayments.
Consultancy firm Digital Finance Analytics compiled a list of the Top 100 Postcodes where people are most at risk of mortgage default. These areas included the outer suburbs of Canberra, southern Tasmania, Darwin, South Gippsland in Victoria, Northern Adelaide (due to the decline in manufacturing), Western Australia (due to the mining downturn), Queensland and NSW's Hunter Valley. It's not necessarily lower socioeconomic groups that are likely to experience higher default rates; the amounts these groups borrow are generally lower, and therefore accrue less interest and are easier to pay off. Many postcodes where people are most at risk are located within regional areas where unemployment is increasing and job prospects are bleak.
According to a recent Business Day <a href="http://www.smh.com.au/business/banking-and-finance/risk-from-australias-landlord-boom-now-bigger-threat-than-corporate-debts-20151028-gkkhbx.html" target="_blank">report</a>, the investment boom in rental properties could potentially mean investors may face larger default risks in comparison to corporate debts. Additionally, the return on rental properties is good, given the current economic state. A recent report by Moody's Investors Service points out that in Sydney, 39.6% of net household income is needed to maintain properties. In contrast, in Melbourne, investors need 26.5 per cent. Both of these amounts are significantly high.
So, how does this affect you as the homeowner?
The Repercussions of High Risk Borrowing
Your dependency on credit financing options, if not curtailed, could lead to catastrophic repercussions. Defaulting on credit cards and personal loans can lead to a negative credit rating, resulting in the inability to secure credit in the future. Defaulting on a mortgage can have even more significant implications, including eviction, homelessness, and the breakup of families. On a national scale, mass defaulting on mortgages due to high unemployment or a spike in interest rates would represent considerable losses to the banks and other lenders. It could cause severe damage to the housing market.
The Solutions to High Risk Borrowing
So, what can be done to reduce the likelihood of Australians defaulting on their debts? Stricter controls by the banks are one remedy. NAB, for instance, has identified <a href="http://www.afr.com/real-estate/the-top-100-postcodes-at-risk-of-mortgage-default-20150818-gj1gja" target="_blank">40 postcodes</a> around Australia where people are at higher risk of defaulting, and is introducing tighter assessment criteria for loan applications, including the requirement for a higher amount of equity. Individuals can also help reduce their own risk of defaulting by looking at strategies for paying their mortgages off faster. These can include tightening their belts and diverting any windfall sums such as tax refunds, bonuses, and investment dividends into your mortgage to attack the principal or by setting up an offset account that earns interest and reduces your mortgage. Other options include negotiating a better deal from your current lender, refinancing your mortgage into a cheaper loan, or switching to an all-in-one loan that you make all of your payment into, to reduce the principal amount on which interest is charged.
Suppose you do find yourself in a situation where defaulting on your debts seems inevitable. In that case, assistance is always available from debt advisory services such as Credit Counsellors Australia. Our highly experienced consultants can help you settle debts through negotiation or consolidation, freeze ongoing interest, stop civil court actions, protect your assets, help you create an effective budget, and ultimately achieve financial freedom from debt.