Will we see a surge in mortgage stress?

As residents of NSW and Victoria anticipate the easing of lockdown restrictions recently outlined by their state premiers, a sense of renewed positivity has come alongside the start of spring for many small businesses and households. But as the population moves closer to 70% vaccinated, a high level of uncertainty continues to linger as recent data highlights just how tough many Australians have had it through lockdown.

A study by fintech True Savings found that more than 40% of Australians were struggling to pay back their mortgages, with 75% of mortgage holders in some lockdown impacted areas in western Sydney and in Melbourne experiencing mortgage stress. According to a Canstar report, more than 1.4 million Australians are in mortgage stress at the moment – a number that could surge from 41% of mortgage holders to 46% if the country enters a double dip recession in the next year.

Read more: Double-dip recession would send mortgage stress skyrocketing – report

While the September quarter is expected to hold a contraction, CreditorWatch chief economist Harley Dale said it was too difficult to know what news the December quarter would bring.

“I don’t think anyone knows whether Australia might have a double dip recession or not,” he told MPA. “We’re prepared for the fact that the September quarter in this year will see a sharp contraction. The Reserve Bank of Australia has that contraction at about 2%. There are market economists out there who have it at 4% or more. However you slice and dice it, it’s going to be a pretty poor quarter.”

While everyone is “having a punt” as to what happens in the final quarter, Dale said he is mostly optimistic.

“I don’t think we’ll have one, but I think it’s very hard to tell exactly what’s going to happen,” he said. “That comes down to vaccination rates and plans to ease lockdown restrictions. That’s a moving target and it’s a situation that is between different jurisdictions in terms of the states and territories.”

In terms of what a double-dip recession would mean for Australian mortgage holders, Dale pointed to the range of accommodative measures that have been put in place since the pandemic began.

“I’d call it a bit alarmist to be concerned at this point about some kind of dramatic drop in households being able to service their mortgage debt because I just don’t think we know enough at this point to make that claim,” he said. “What we do know is there is a lot of support being shown for households and businesses to help them get through a very difficult time. I think that’s one of the most important reasons why we are seeing consumer sentiment show a bit of resilience after dropping sharply in the middle of the year. We are seeing business confidence showing some resilience after taking a bit of a dip earlier in the year and I think a lot of that is around the support being provided by various enterprises to try and help people keep going.”

According to Mortgage Choice CEO Susan Mitchell, mortgage stress levels have remained relatively low in 2021.

“Historically low borrowing costs, financial support from both state and federal governments, and the refinancing boom have all kept a lid on mortgage stress rising to 2020 levels,” she said. “NSW and Victorian borrowers are understandably experiencing some pain on their mortgages as extended lockdowns create extra household financial pressures, especially for employees that remain out of work.”

Like Dale, Mitchell expressed an optimistic economic outlook – as well as some uncertainty.

“The lift in vaccination rates, combined with lockdown restrictions easing, indicates the economy is unlikely to shrink further during the December quarter,” she said. “However, it is difficult to determine what scars will linger as some sectors will bounce back while others may be left behind in the recovery.”  

Read more: Life after lockdown

Sydney broker Daniel O’Brien from PFS Financial Services, told MPA he hadn’t seen much mortgage stress in his local market of northwestern Sydney. Out of the 4,000 clients he has settled loans for, there have only been a couple who have taken repayment pauses this year.

“Last time around there was definitely more, but I think a lot of people that did it last time didn’t need to,” he said. “They just did it out of fear and to be conservative - just in case. Having the hindsight of last year, I think people know that it’s not the end of the world, so less people are panicking this time.”

He said some people had put their property plans on hold because of current restrictions and that he expected a surge in activity once lockdown ended.

“When it does open up, I think it’s going to go crazy again,” he said.

According to Mitchell, a double-dip recession wouldn’t necessarily be a cause of panic for mortgage holders.

“This is mainly because wage support will likely remain for as long as we’re in lockdown and lenders are likely to take a similar approach with their support measures,” she said, adding that anyone who is in mortgage stress should contact their lender or broker about hardship options.

Dale pointed to the silver lining of a potentially rapid recovery coming out of lockdown that would “spark a fire very quickly,” and create good news for mortgage holders and business owners.

“Economic activity will come back in a very big way, very quickly once economic conditions allow businesses to operate in something at least resembling a normal environment,” he said. “While we have this barrage of negative news at the moment, businesses, particularly SMEs, should look at, when things open up, that there is going to be commercial opportunities there that avail themselves very quickly and will allow economies to get back on track.

“That’s the beauty of plans to open up economies again in and around the ongoing challenges we’re going to face from COVID-19, particularly from the Delta virus.”