Eat all the smashed avo you want,
house prices won't go down

It’s time to give millennials a break. It’s easy to pretend younger generations don’t work hard to get a home loan, but the reality is house prices compared to income are far, far higher than they used to be.

Reserve Bank of Australia research shows that back in 1985, the dwelling price to income ratio across the main five capitals sat around 1:3 for most, with Sydney closer to 4:1. Now, these are all above 6:1. While there are many variables, in terms of price to household income generally speaking, it’s twice as hard to buy a home today as it was 30 years ago.

But does that make a mortgage twice as dangerous for your credit score?

How mortgage stress impacts your credit score

Mortgage stress is a general indicator of how many Australians are struggling with their home loan repayments, and Roy Morgan research from June 23, 2017 shines a light on this.

Over the previous three months, 16.8 per cent (666,000) of mortgage holders were classified as at risk, and 11.6 per cent were extremely at risk. Both figures are lower than the year before (and significantly lower than 2008 peaks), but this is still more than a quarter of people with home loans that are struggling to keep it together.

As you might expect, this percentage skyrockets when you look at those on lower incomes – 85.3 per cent of people earning under $60,000 are classed as at some level of risk in the past quarter.

Even with historically low interest rates, making repayments in the current economic climate is proving difficult for many people. Theoretically, this would mean more people are on the cusp of a mortgage default, which could have serious ramifications for their credit score.

However, this might not always be the case. For banks, defaulting mortgages is often a last resort to take against borrowers, which is why the default rates on home loans tend to be much lower than for other products. Much more common is the threat of a default listing, which often incentivises people to prioritise mortgage repayments immediately.

If a mortgage default were to occur, it will stay on your credit score for five years – just like most other defaults.

The benefits of home loans for your credit score

Despite the ongoing stress suffered by many mortgage holders, having a home loan can actually be extremely beneficial for your credit rating, thanks to stringent approvals processes.

Under the National Consumer Credit Protection Act, all licensed credit providers must be confident that consumers are actually capable of paying back a debt. This depends on many factors when it comes to mortgages including: the size of a deposit, the consumer’s credit history, income over the past few years, and the fees/extra costs (such as lenders’ mortgage insurance) that could apply.

Given that a home loan is often the largest type of debt an Australian will incur in their lifetime, being approved for a mortgage can actually bolster the confidence of other credit providers down the line. After all, if a bank has decided you are capable of paying back a $600,000 mortgage over 30 years, you’re probably going to be responsible about paying off that credit card or phone bill.

After making regular mortgage payments for a few years, consumers will likely have an excellent history of debt repayment under their belt. This is a prime example of ‘good credit’ – responsible behaviour around debt repayments that can make credit providers more likely to approve your next application.

Bringing it back to your brunch…

This is all useful information for people who do have a mortgage, but those struggling to get on the housing ladder may be feeling a little left out. Roy Morgan’s research shows an increasing number of mortgage applicants in the $100,000+ bracket, implying that young people on lower incomes do not have a clear way forward for securing a loan or buying property.

Even renting can be a struggle – CoreLogic RP Data’s Perceptions of Housing Affordability report shows 62 per cent of people living at home simply can’t afford to move out. While many may decry this as lazy, in the current economic environment it simply may be the best way to save money.

Family is a resource for young buyers in another way – 30 per cent believe an inheritance or parents as guarantors is how they will get on the property ladder.

It’s bleak reading, in a sense, but it seems people are finding a way to work through skyrocketing house prices. Buying in new suburbs, using non-traditional lending products, buying a first home as an investment and even getting parents as guarantors are all increasingly common. Based on the amount of money required to get a home loan deposit, it seems fair to say skipping smashed avocado alone isn’t getting anyone anywhere.