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Aussie home buyers are spending 41.4% of their income on a mortgage

By ,| 7 min read

Housing affordability has become a major issue in Australia, with many first home buyers scratching their heads wondering how they can get a foot on the property ladder.

Recent research shows that on average, Aussies will need to contribute over 40% of their income to make their repayments.

In this article, we’ll discuss how much income is needed to pay off a mortgage and how long it typically takes to save a deposit. We’ll also take a look at what’s happening with the property market, housing affordability and how you could minimise your monthly repayments.

How much income is needed to pay off a mortgage?

According to a recent study in March 2022, 41.4% of a borrower’s income was needed to service mortgage repayments.

This amount has marked the 3rd consecutive increase on a nationwide level and sits above the decade average of 36.52%.

This uplift can be attributed to higher average mortgage rates and booming property values.

Now that home loan interest rates have started increasing due to the rising cash rate, home owners could face additional challenges with their home loan repayments.

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How is increasing home loan debt contributing to mortgage stress?

Mortgage stress occurs when a borrower experiences financial strain due to home loan obligations. This can start to affect other aspects of life such as mental health and financial wellbeing.

Borrowers typically experience mortgage stress when their home loan repayments make up over 30% of their pre-tax income.

In March 2022, 42% of Aussie households experienced financial stress, even before the first rate hike in May. This is the highest percentage recorded over the past 20 years.

With the current average percentage sitting at 41.4%, it’s no surprise more borrowers are feeling the pressure. In total, 1.5 million Aussie households have stated that they are under mortgage stress.

How long does it take to save a deposit?

One of the greatest upfront costs of buying a home is the deposit. As of March 2022, the average 20% home loan deposit for the median dwelling value across Australia was $147,795.

According to new research, the time it takes to save up a 20% deposit for a home has increased to 11.4 years without help from the ‘Bank of Mum and Dad’. That’s an increase of 2.2 years since the onset of COVID-19 in March 2020.

This metric was based on median household income data of $1,665 per week for the March 2022 quarter and 15% savings of a household’s gross annual income.

In Sydney, Australia’s most expensive housing market, the time it takes to save a 20% deposit is estimated to sit at around 14.1 years.

What’s happening with the property market and house prices?

The COVID-19 pandemic played a significant role in the upsurge in property prices.

Although the Australian housing market experienced an initial dip after the onset of the pandemic, housing values began climbing in the last quarter of 2020.

Over the past 2 years, from March 2020 and February 2022, housing values increased by 24.6%.

The property price boom in Australia can be attributed to 3 different factors:

  1. Dropping interest rates from several cash rate cuts over the past decade, bringing the cost of borrowing money down to all-time lows
  2. The introduction of several government grants and initiatives to help prospective home buyers enter the market
  3. A growth in household savings as Aussies stayed at home during COVID-19 lockdowns.

Due to the lasting effects of the COVID-19 pandemic, housing affordability has continued to nosedive over the past few years. This has made it even tougher for prospective buyers (particularly first home buyers) to enter the housing market.

What’s happening with housing affordability?

Housing affordability is the correlation between housing prices (which includes values, home loan repayments and rent) and household incomes.

The recent property market boom is not the first we’ve seen of skyrocketing dwelling prices. In fact, housing affordability has been in decline since the 1980s. The price to ratio index has increased by 78% in the 35 years between 1980 and 2015.

In Australia, the ratio of average disposable household income to median house prices is at its highest – increasing from 3.3 in 1981 to over 7 in 2015.

As of March 2022, it’s estimated the median dwelling value in Australia is 8.5 times the median annual household income. This has increased rapidly from where it sat at 6.8 during the start of the COVID-19 pandemic.

As of today, Australia is ranked 2nd on the list for the least affordable housing markets around the world, falling only behind Hong Kong. Several Australian cities, including Sydney, Melbourne, Adelaide, Brisbane and Perth are all featured in the top 20 ‘least affordable housing markets in the world’ report.

In April this year, the value of new loan commitments for housing fell 6.4%. For owner-occupier housing specifically, it experienced a fall of 7.3% – the largest fall since May 2020.

If you break this down to first home buyer owner-occupiers, the national level of new loan commitments in this category fell 4.4%. This is 32.3% lower than the year before in April 2021.

Although the uplift in housing prices has started to slow, like we’ve recently seen in Sydney and Melbourne, prices in some areas are still on the rise.

What’s being done to improve housing affordability?

The Australian Government has committed to tackling the housing affordability crisis by implementing several new housing affordability initiatives and programs. These include the Help to Buy program and the introduction of a new Regional Home Guarantee.

The Help to Buy program

The Help to Buy program is being created to slash home buying costs by up to 40%. This program is set to help 10,000 eligible home buyers each year who don’t currently own land or a property.

Home buyers will only need a deposit of as little as 2% and won’t have to pay Lender’s Mortgage Insurance (LMI). This is because the government becomes an equity partner in the property by providing up to 40% of the purchase price for a new home and up to 30% for an existing home.

The Regional Home Guarantee

The initial plans for the Regional Home Guarantee were first introduced by the Liberal Government, but are now being picked up by the Labor Government following their federal election win in May.

This guarantee was created to help regional buyers – both first-time buyers and buyers who haven’t owned property in the past 5 years – buy a home with a low home loan deposit.

It requires a deposit of only 5%, with the government providing up to the remaining 15%, preventing LMI charges.

How can you minimise your monthly repayments?

It could be worth getting in touch with a home loan expert so you can get guidance suited to your needs and situation.

If you’re currently experiencing mortgage stress or simply want to find ways to reduce your monthly home loan repayments, there are a number of options out there, including:

1. Check that you still have a competitive interest rate

Comparing your home loan interest rate with others on the market is a great way to check that you’re still getting a fair deal.

Reducing your home loan interest rate can make a big difference, even if the rate reduction is minor. Here’s an example of how a rate reduction of just 0.1% on a $400,000 25-year P&I owner occupier loan can change the repayment amount:

Interest rateMonthly repaymentYearly repayment

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2. Refinance to a loan with low or zero fees

Fees can vary between lenders and from one home loan product to the next. Some home loan products will charge monthly or annual maintenance fees, while others waive these fees entirely.

Keep in mind that some lenders will redistribute these costs into the interest rate and charge slightly higher rates. That’s why it’s important to calculate and weigh up the costs involved.

3. Refinance to a longer term loan

You could consider refinancing to a longer term loan if you’re struggling with high monthly repayments.

While this will increase the amount of interest you pay over the life of your loan and the time it takes you to pay off your home loan, it could be a suitable solution.

It could be a smart move to speak to a financial advisor before you make a decision. That way, you can find out if it puts you in a better financial position or whether other options are more suitable for you.

4. Consider fixing or splitting your interest rate

If you’re worried about continually rising rates in 2022 and steady monthly repayments are high on your priority list, it might be worth looking into fixing your rate.

Getting a fixed rate home loan ensures your monthly repayments stay the same for a fixed period of time (usually 1-5 years). This means you won’t be affected by fluctuating interest rates until you roll off your fixed term.

Alternatively, you could also look into getting a split rate home loan if you want access to loan features that are typically only available on variable rate home loans.

This includes things like attaching an offset account or redraw facility to the variable portion of your loan or making unlimited extra repayments on the variable portion.

You can also split your home loan in any way you’d like. For example, you could choose to do a 50/50 split, or if you prefer to have a majority of your loan on a fixed rate, you could do a 80 fixed/20 variable split.

5. Get an offset account

If you prefer a variable rate home loan, it might be a good idea to get an offset account if you have funds sitting in your regular savings account.

An offset account acts like a savings and transaction account attached to your home loan. It is designed to reduce the interest you pay on your home loan by offsetting your loan balance.

The more funds you have sitting in your offset account, the less interest you pay on your home loan.

For example, if you have a $400,000 loan amount and put $50,000 of your savings into your offset account, you’ll only be charged interest on $350,000.

How much can you save with an offset account?

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You’re also free to withdraw funds from your offset account at any time without being charged any withdrawal fees.

Just keep in mind that you’ll typically be charged an annual fee for keeping your offset account open. So, it’s important to do the maths to find out if the amount you’ll save in interest will outweigh the amount you’re charged in fees.

If you’re struggling with your repayments or you’d like home loan help, reach out to an expert for free and take control of your home loan today.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: property prices, property value, deposit, home loan, loan repayment, mortgage repayment, repayments, refinance, fixed rate home loans, split loan, offset account

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Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 25 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. Lendi Group Pty Ltd, which is the ultimate holding company of the Aussie and Lendi businesses is owned by numerous shareholders including; banks such as CBA, 1835i (ANZ’s external venture capital partner) and Macquarie Bank, the Lendi founders and employees, and a number of Australian institutional investors and sophisticated investors including UniSuper.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria. Top rates include lenders who are on our panel and are then defined by the circumstances provided by the borrower.
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