Mortgage brokers have an important role to play for the increasing number of households experiencing mortgage stress, as they are a “very good source of advice” according to a market analyst.
Around 52,000 households are now at risk of default in the next 12 months, according to mortgage stress and default modelling from Digital Finance Analytics for the month of April.
The modelling revealed that across the nation, more than 767,000 households are now in mortgage stress (669,000 in March) with 32,000 of those in ‘severe’ stress. Overall, this equates to 23.4 per cent of households, up from 21.8 per cent on the prior month.
Speaking to The Adviser, Digital Finance Analytics principal Martin North remarked that mortgage brokers have a role to play for stressed households in terms of helping them “find their way through the maze”.
“Maybe that's a restructure, maybe it's a different type of loan… I think [brokers] are a very good source of advice for households and for people who come and seek guidance [for example] refinancing may help,” Mr North said.
In saying this, Mr North noted that when it comes to identifying an appropriate loan for customers, brokers should remain “conservative” in their estimation of what households can afford.
“Don't encourage households to borrow as big as they can. That 2 to 3 per cent buffer is really important, and those spending and affordability calculations are really important.
“There's an obligation both on brokers and on lenders to do due diligence on borrowers to make sure that they're not buying unsuitably, and that includes detailed analysis of household expenditure.
“My observation is that some of those calculations don't necessarily get to the real richness of where households are at, so I think that all those operating in the market need to be aware of the fact that how we look at spending becomes really important on mortgage assessments.”
Mr North added that brokers should operate on the assumption that rates and the cost of living will continue to rise, while incomes remain static.
“So, don't try and flog that bigger mortgage,” he recommended. “I would say be conservative in your advice and the structure of the conversation you have.”
The latest results of Digital Finance Analytics’ mortgage stress and default modelling are “not all that surprising”, Mr North said, considering that incomes are static or falling, mortgage rates are rising, and the cost of living remains “very significant” for many households.
“All those things together mean that we've got a bit of a perfect storm in terms of creating a problem for many households,” he said, adding that for many households, any further rises in mortgage rates or the cost of living would be sufficient to move them from ‘mild’ to ‘severe’ stress.
“It doesn't take much to tip people over the edge. It takes about 18 months to two years between people getting into financial difficulty and ultimately having to refinance or sell their property or do something to alleviate it dramatically, so I think we're in that transition period at the moment as rates rise… over the next 12 to 18 months my expectation is that we would see mortgage stress and defaults both on the up.”
According to Mr North, Digital Finance Analytics’ data uses a core market model, which combines information from its 52,000 household surveys, public data from the RBA, ABS and APRA, and private data from lenders and aggregators. The data is current to the end of April 2017.
The market analyst examines household cash flow based on real incomes, outgoings and mortgage repayments. Households are “stressed” when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30 per cent) directed to a mortgage.
The next step in mortgage broking
Mr North's comments come after Yellow Brick Road chairman Mark Bouris flagged offering financial management services and budgeting advice as one of the next evolutions in mortgage broking.
Mr Bouris believes Australians should not be loaded up with a 30-year mortgage. In fact, he says brokers should be helping clients get out of debt faster.
“One of the things that is really important to me and I think will be the most important emerging product and service between brokers and planners is financial management. By that I mean budgets and showing someone how to pay their mortgage down faster than the schedule,” Mr Bouris told The Adviser earlier this year.
“Usually, once someone borrows money from you, they don’t want to deal with you. But if you could show them how to pay it off faster, they will deal with you. And they’ll pay you for that,” he said.
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