Australia is among the most indebted countries in the world, and if estimates are to be believed, hundreds of thousands of Australians are on the verge of mortgage stress.
While we should absolutely be asking tough questions about lending practices, we shouldn’t let the other half of the equation – borrowers – off the hook so easily.
Martin North of Digital Finance Analytics described on the ABC’s Four Corners on Monday the issues facing mortgaged Aussies as a “perfect storm”.
The show suggested that high property prices, a “cult” of property-obsessed Australians eager to buy real estate irrespective of the cost, and potentially imprudent lending standards, had led to a situation where even a small interest rate rise or period of economic hardship would leave many borrowers in mortgage stress.
In fact, many of the home owners quoted on the show were in this very situation – dealing with mortgages they could no longer afford, and in some cases could ill-afford in the first place.
Concerns about high-pressure tactics from banks, the commission-structure putting pressure on brokers to encourage buyers to borrow more and the very culture of debt that we live in are all valid. And if a loan has been fraudulently given, the lender must be put under scrutiny and rectify the situation.
But while estimates an interest rate increase of 1 percentage point could cause thousands more people to struggle makes for a shocking headline, we need to look at borrowers too – the individuals who, ultimately, have the final choice on whether or not they sign off on the debt.
After all, it takes two to tango.
Borrowers have the power to say no to a purchase, can stop bidding at an auction if the price goes above their budget, and can walk away from a transaction.
Buyers can save for longer, buy something cheaper or keep renting if they cannot afford to borrow.
It’s true property spruikers speak of the power of compounding interest and leverage – and both these tools can be useful in building wealth.
Yet it seems something has gone dramatically awry here.
Many have joined in to what Yellow Brick Road’s Mark Bouris described as the “frenzy” of property buying – a word that speaks volumes about the financial decisions being made by some in a hot market.
It seems the countless property busts overseas and the breathless media coverage have done nothing to teach people to consider the risks of debt.
We certainly do not learn about this in high school, and mortgages and investing are hardly on the standard curriculum.
In fact, most people’s financial literacy comes from their parents. And 20- and 30-somethings’ parents on Australia’s east coast capital cities – where prices are much higher – tend to fall into a category of people who have seen prices double on average every decade. For them, buying in, even with a small deposit, always seems like a good idea.
For many young people who are yet to buy or without significant equity, the message is to take advantage of supposed ever-rising property prices. There’s often very little suggestion to consider what will happen if prices fall.
But even if there is no significant drop in property prices, there are serious risks when taking on debt.
The fallout of divorce, death, job loss, sickness or interest rate increases is not to be taken lightly – and every person should consider the impact of these events somewhere in their future and how they would repay a loan they have committed to for 25 years.
Some research indicates as many as a third of mortgage-holders would be forced to sell their home, or another property asset, in the case of a serious illness that left them unable to work or in a situation of redundancy.
Having the appropriate income protection, life insurances and an “exit strategy” is absolutely critical, particularly when buying at the tail-end of a property boom.
Knowing what your household budget looks like, and how much breathing room you have left after taking on a mortgage is not an additional extra. This is a mandatory step for any borrower and whether or not lenders are asking these questions, borrowers absolutely should be.
It’s financial literacy 101.
Just because a bank is willing to loan you $1 million doesn’t necessarily mean you should borrow it.