Mortgage stress at 30%? A poor reference
Why are we told we are in mortgage stress because of one number – the 30% income to repayment ratio?
Mortgage stress in Australia is being reported on—seemingly daily.
Mortgage stress and ‘startling results’ are a common coupling – headlines that conveniently lack proper context.
“It can be misleading when benchmarks are picked up, applied incorrectly and reported widely.”
The headlines for stories around mortgage stress are often provocative:
It is enough to make me question if I should be stressed—and that’s coming from a licensed credit professional.
The 30% of income as a repayment ratio seems to be used as a catch-all:
- Some use it in recommending an amount to borrow:
So if household income is $10,000 a month, repayments should be under $3,000 per month. - Others define it as the tipping point of mortgage stress:
If repayments are $3,500, I may be in mortgage stress.
Many Australians will mistakenly make conclusions based on the ‘expert’ commentary on mortgage stress:
Under 30% you should be okay – Over 30% you should be stressed?
It is not that simple. It is an over-used ratio.
It can be misleading when benchmarks are picked up, applied incorrectly and reported widely. I see various mortgage benchmarks increasingly used in reports on the ‘health of the housing market— specifically the 30% repayment to income ratio as it refers to ‘mortgage stress levels’.
Can one ratio indicate mortgage stress?
When I started researching the accepted measures of mortgage stress, I could not find one source that applied to all borrowers—I do not think there is one.
Don’t get me wrong, I love numbers, but in my experience as a mortgage broker I know one ratio will not tell the full story for a loan application – let alone whether a household is in mortgage stress.
So rather than rely on ratios that, in my opinion should not used in isolation, I decided to produce some data of my own—an analysis using real borrower information.
**ANALYSIS OF REAL LOAN APPROVALS**
I reviewed approved loan applications from 2020-22 to and published their ratios. Real people, real ratios – no theory about it.
I wrote about these results in my article: “Stress-test of home loans approved in
2020-22 | I share results”
The popularly recommended 30% repayment ratio
On one hand, using a 30% ratio to compare different households’ exposure to debt seems logical. But it completely ignores how much (in dollar terms) borrowers have as surplus income after their living expenses.
Of the many expert commentators, interestingly CommBank makes a repayment recommendation of 30% of your after tax salary.
I dug down into where the 30% figure stemmed from.
I see it used in reports from both the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA) which, on one hand gives the 30% number credibility. But they break it down further into different income and household segments before interpreting anything.
I did find a similar measure derived by the Australian Housing and Urban Research Institute (AHURI) – a national independent research network that partners with Government. Many commentators refer to AHURI when referring to the 30% measure.
But that is not the intended use of the 30% measure from AHURI.
AHURI considered 30% as a housing stress tipping point for the proportion of income going to housing costs for households with the lowest 40% of incomes. Also from AHURI: it is “not a scientific measurement or a guide for determining housing affordability in the general housing market.”
Another reason this measure is not useful as an indicator of mortgage stress is it was designed to consider all housing costs – not just home loan repayments.
Debunking the 30% repayment ratio as mortgage stress indicator
In my experience, the 30% repayment ratio has never been a showstopper to a home loan application. So, I do not see why you should assess you own capability for a home loan based on the 30% benchmark.
“Too many articles offer recommendations without even knowing your current situation, your back story, and what you are capable of.”
Check out this headline:
Let’s examine the statement, “…. you’re likely experiencing housing stress”.
Really?
First: Mortgage stress and housing stress are two different things.
Second: A catch all mortgage stress measure is not an actual thing – just something picked up and run with by various publications.
Third: The adopted measure of 30% is supposed to be for all housing costs (rent, utilities, repayments. etc.) as a ratio of gross income for the lowest 40% of household incomes. Which in 2019-2020 ABS showed was $73,163pa.
Too many articles offer recommendations without even knowing your current situation, your back story, and what you are capable of.
**MY OWN ANALYSIS**
I conducted my own analysis of real loans for real borrowers to see what was approved.
You can see the results including the real mortgage ratios for loans approved here.
Lowest 40% income households likely to own outright or rent – No mortgage
So, if the measure of stress was designed for households with the lowest 40% of incomes, why are do we keep getting this rammed down our throat as a mortgage stress measure for all households?
It does make a great headline.
“Are Australian borrowers mistakenly being told they are in mortgage stress when they aren’t? I suspect so.“
It becomes silly when you look at how many of these households have mortgages:
In a wealth and income report published by the ABS the households with disposable income in the lowest 40% are likely either renting or own outright.
Analysis shows of the ABS figures shows this this cohort of households have 26% of Australian mortgages.
So, if households with the lowest 40% of incomes have only 26% of Australian household mortgages – why is this measure being applied to the other 74%?
Are Australian borrowers mistakenly being told they are in mortgage stress when they aren’t? I suspect so.
The question I ask is why are so many publications and finance commentators using a measure that was designed to use Australian with a household income in the lower 40%, being used to measure the other 60%?
I tested the 30% ratio on home loans that were approved
I am naturally curious. My undergraduate degree was a science.
I was interested to see how the loans I did stacked up against popular ‘accepted’ measures.
I used both gross and net incomes to measure these ratios as lenders, media, government advisory and research bodies can report on this measure with either – gross or net. Disturbingly some don’t specify whether the ratios used are for net or gross income – it can make a big difference.
I analysed the loans I had approved over a three year period (2020-2022) to see what ratios these borrowers had. Did I had put any borrowers into mortgage stress? Let’s see.
Here is a brief insight:
- 32% of groups I saw get approved between 2020-22 had a repayment ratio over 30% using net income.
Does this mean 32% of all applications I put through should not have been approved?
This changes drastically when I put the same clients through the analysis as if they borrowed at 2024 interest rate levels.
- The higher interest rate test saw the proportion of borrower groups needing over 30% of after-tax salary increased to 81%.
Here is where it gets really interesting.
If CommBank’s borrowing capacity guidance is that borrowers should commit no more than 30% of their after tax salary to home loan repayments – then why did they approved many of these loan applications?
- The highest repayment ratio was from a borrower with mortgage repayments making up 54% of net income and 40% of gross. Was he stressed then? Nope.
- Was he stressed in 2024 when theoretically his repayment ratio increased to 71% of net and 52% of gross? Nope.
Part of the reason the high borrowing ratio made sense to this borrower is explained by AHURI – those on higher incomes pay more than 30% of income on home loans by choice.
Some of the reasons I could see for borrowers carrying a higher income to repayment ratio were:
- High levels of investment debt
- Low or nil owner occupied debt
- Significant offset savings or funds in redraw
- Low living expenses
You can see the number of borrowers in my analysis with high income to repayment ratios here.
Who to rely on for borrowing capacity guidance?
If you are looking for information to avoid being stretched or stressed with your mortgage, meet with a mortgage broker. I have been doing it since 2008 and can introduce you to a licensed mortgage broker.
A mortgage broker will consider your goals, objectives and aspirations. These could be to own a home, buy investments, go on holidays, live a certain lifestyle, and have choices around schooling.
Their level of analysis is the type of detail required to determine a suitable borrowing amount for you, rather than rely on an over-used (and mis-used) 30% benchmark.
Final word
Online content creators, and in the case of the CommBank article – I suspect marketing departments – write about home loans to educate and appeal to masses.
In doing so they can fall for an ‘one size fits all’ measure – an easy headline.
CommBank’s recommendation is a prime example. As a mortgage broker I have used them for years as they have a well-defined lending policy. They have multiple points of assessment designed to understand as much as they can about the borrower’s financial position. So, to recommend a flat 30% repayment ratio is at odds with that.
Maybe it is exactly that – just a recommendation. A ‘nice to have’, but unrealistic for many.
I am not saying that borrowing an amount where more than 30% of your after tax income goes to home loan repayments is okay. It may or it may not be appropriate for your situation.
I want readers to understand that when an ideal borrowing amount is ‘recommended’ to them from an article, it is not something to base their own loan eligibility on.
Before acting on any recommendations, the first question to ask is; Are they a licensed professional? The second; Have they met you?
The answer is usually no and no.
I recommend borrowers speak to a licensed mortgage broker or lender directly. This way their unique situation can considered.
I introduce borrowers to licensed mortgage brokers here:
My analysis of real mortgage ratios are published here.
