Basic calculations for mortgage stress could leave you with the wrong perception of how your financing arrangement impacts your portfolio. We spoke to an expert to see what investors should be factoring into their planning.
Mortgage stress typically refers to whether a borrower’s monthly mortgage repayment income surpasses 30 per cent of their monthly income.
However, for seasoned investors, this is not necessarily a helpful guide. According to Peter Koulizos, chairman of the Property Investment Professionals of Australia, mortgage stress is something that is vastly dependent on personal circumstances, and can't be reduced to a universal calculation.
“Here’s how percentages can lie. Say you’re on $300,000, right? And your mortgage repayments are $100,000 a year; 33 per cent. My income is ... $70,000, and my mortgage repayment is $20,000 or 29 per cent,” he said to Smart Property Investment.
According to the conventional calculation, this means the smaller mortgage would not be considered stressful, but the reality paints a different picture.
“When you look at it, you think, ‘You’ve got a $100,000 and mine’s only $20,000’, but you still have $200,000 to play with after you pay your mortgage. I have less than $50,000,” Mr Koulizos said.
“You can make stats work for you or work against you, and you have to look beyond just the percentages, because after your mortgage repayment is gone, you’ve still got a lot of money to play with, but I haven’t.”
Mr Koulizos also pointed out how the general understanding of mortgage stress could be misleading itself.
Using the example of someone with a similar job and similar skillset who owns property in Sydney and Adelaide, Mr Koulizos said while both their incomes would be similar, the person in Sydney would be expected to roughly pay twice as much for their property than the person in Adelaide due to higher prices, so then they would have to pay twice as much on their mortgage.
Taking the term to its most literal meaning, Mr Koulizos said the person with a mortgage in Sydney would be much more susceptible to stress about their mortgage if they happened to lose their job.
“If my mortgage wasn’t as big, and if I did lose my job, then at least I know I've got a few months’ worth of savings to keep me going until I get the next job. But, if the mortgage is so big I’m only living month to month, I would be stressed,” he said.
Check out our range of free calculators for property investors here