In recent years, many Australians have battled rising interest rates and consequent mortgage repayment hikes, but not everyone is prepared to keep taking the hit to their cashflow.
Tash, 38, and her husband, Matt, 42, felt the financial squeeze as the rising rates impacted the payments on their Newport home, located on Sydney’s northern beaches.
Selling up in Sydney's pricey Northern Beaches allowed the couple to 'downsize' their mortgage in a different state. Picture: realestate.com.au/sold
They’d used equity from an investment property in Narrabeen to buy their Newport pad in 2017, but with a small child and a desire to spend more time as a family, Tash recalls her husband saying, “I want a bit more financial freedom,” and they elected to sell the investment, along with the Newport home so they could downsize to something more affordable on the Gold Coast.
The couple were fortunate to have benefited from a 30% price spike during Covid, so they had equity that allowed them to significantly reduce their debt burden.
But it was a tense period for the couple, as rapid interest rate increases from mid-2022 pushed many buyers to the sidelines.
Median house prices in Newport peaked at $3.3m in 2022, providing windfall gains for Tash and Matt. Picture: realestate.com.au/sold
“We sold at the turn of the market which was very stressful. It took 12 weeks and we didn’t take the first offer.”
Selling soon after buying comes with risks
REA Group’s senior economist Eleanor Creagh observes that the number of people experiencing extreme mortgage stress is reducing.
She highlights the RBA's most recent Financial Stability Review, which indicated the share of loans more than three months in arrears has stabilised at around pre-pandemic levels.
“The financial stability review does note that some highly stressed borrowers have been able to avoid losses, and even repay debts, by selling their properties, thanks to recent housing price growth," Ms Creagh said.
Rising property prices can provide a buffer against losses for those reselling after a short holding period. Picture: Getty
Ms Creagh adds that not everyone has significant equity to fall back on, and selling just a few years after buying can reduce the likelihood of making a profit, especially once transaction costs, including stamp duty and agent commission, are accounted for.
Although few mortgage holders are in real dire straits, “Household equity positions are strong in general, with less than 1% of households currently in negative equity – a meaningful improvement from pre-pandemic levels,” Ms Creagh said.
But she added that cashflow remains a challenge for many households, with around 3% of borrowers experiencing a cashflow shortfall, putting them at risk of falling behind on loan repayments.
Custom Call to ActionFor those who are selling without a solid equity buffer, Ms Creagh adds that a typical recovery time following a break-even or loss after the sale of a property will depend on many factors including market conditions, the borrower’s capacity to rebuild buffers or re-enter the market and future interest rates and broader economic trajectory.
Rising to meet repayments
Mortgage Choice broker Terri Unwin says her current active buyers are generally in two camps: those who borrow every potential dollar and those who give it more long-term though; capping their borrowing even though they can service a higher amount.
For buyers who aren’t sure how close they should go to their limit, Ms Unwin suggests putting the difference between their current rent and the future mortgage amount into another account and managing their money like they’re already paying the full mortgage sum.
“My motto is live like you already have the mortgage,” she said, adding that would-be buyers quickly realise that they haven’t accounted for life, which is where things come unstuck.
Mortgage Choice broker Terri Unwin recommends prospective buyers live like they already have a mortgage to uncover any financial pain points. Picture: Getty
“People use the calculators and know they can afford their payments but aren’t prepared when the car battery dies or they want to go away with friends.”
On the flipside, Ms Unwin says a generation of buyers have never experienced successive interest rate hikes until now - those who bought a decade or so ago had a dream run until 2022.
Some mortgage holders who have learned from recent years are still paying the higher interest rate to create a buffer.
”If they’re comfortable paying at that level, it’s forced savings and they can redraw the money if they need it,” Ms Unwin said.
Is your mortgage serving your financial wellbeing?
Personal finance consultant Betsy Westcott argues that you can still be managing your mortgage, but struggling to get ahead.
“If the property isn’t serving your financial position, stepping back into something more affordable could put you in a stronger position in the long-term,” she said.
“We over-index on homeownership and forget how much consumption costs,” she added, explaining that freeing up more cashflow can support other financial decisions including saving and investing.
Ms Westcott says those who choose to sell and free up income may be able to “build a cash reserve for emergencies, clear any high interest debt that may have accumulated and set some goals.”
Tash and Matt downsized their mortgage, selling up in Sydney's Northern Beaches to buy a more affordable house on the Gold Coast. Picture: Supplied
That’s exactly the sort of freedom Tash and Matt were afforded when they sold their Newport property.
Although they were downsizing, it was not without its risks. As someone who worked in television, Tash held some concern about contract opportunities. Additionally, after selling their Sydney residence, they moved to the Gold Coast, rented and worked before committing to a new dwelling located on the Gold Coast’s Palm Beach.
The uncertainty was unnerving. “Even though we were downsizing our mortgage, we were still moving our comfort zones,” Tash said.
“It was challenging because I had a community in Newport, and I had to recreate that in Palm Beach.”
But two years into her Queensland life, she says it was worth it. Tash continues to attract freelance work in television and Matt uses his carpentry trade when needed, but they’re not slaves to a mortgage.
English (US) · 