With a threat of mortgage interest rate rises in the near future, home buyers are asked to tread carefully.

After dipping over the first half of this year, financial stress levels are on the rise.

With the next movement in interest rates likely to be up, first-home buyers are being warned to be careful not to let their finances become over-stretched.

The Consumer Financial Stress Index, produced by credit-ratings agency Dun & Bradstreet, recorded 15.7 in October after hitting a low of 11.5 in August.

The main reason for the increase in the index, which measures consumers’ demand and capacity for credit, is the sharp rise in house prices in Sydney and Melbourne. Other factors in New South Wales and Victoria include limited wages growth and soft labour markets.
Both property markets are being driven by investors and up-graders with first-timers locked out because of the rising prices. Median dwelling prices (which includes units) in Sydney have reached a record high and Melbourne is near its all-time peak. During the past year, the median dwelling price in Sydney is 11.5 per cent higher and almost 7 per cent higher in Melbourne, according to RP Data.

“With the Reserve Bank widely tipped to begin raising its interest rates in the new year, buyers who are planning to enter the market now need to have an eye on future affordability,” says Steve Brown, a director of Dun & Bradstreet. He is expecting the Consumer Financial Stress Index to move higher after Christmas when personal finances often come under pressure.

People tend to spend-up on their credit cards over the festive season with the credit card debt falling due in January and February.

The concern is that people have become used to very low interest rates. Brown says mortgage repayment difficulties could rise when interest rates eventually move upwards and the size of the repayments increases.

“Mortgage stress is generally considered to occur when repayments are at 30 per cent of pre-tax income, so it’s not difficult to see the impact a few interest rate rises could have,” Brown says.

He says that mortgage holders need to have certainty of income, given the creeping unemployment rate in Australia, which is forecast to breach the 6 per cent mark next year. According to research conducted earlier this year by Dun & Bradstreet, 17 per cent of consumers surveyed had no savings, while 32 per cent would only be able to live off their savings for one month if they lost their job.

“People need to make sure they not only earn enough money to meet their regular obligations, but that they can survive financially in the event of a job loss or other interruption to their earnings,” Brown says.

The cost of getting behind with loan repayments is about to become potentially much higher. Under changes to credit reporting rules, more information will be held on credit reports. These are the reports that lenders use to help assess credit applications.

At the moment, only payments of more than 60 days late are recorded and they are recorded as “defaults”. When the new regime starts in March, a payment of more than five days late may be recorded as “not made”.

While the new regime does not start until March, payment history going back to December 2012 can be included in the reports. Payment history for telecommunications and utilities are not recorded and that will not change.

“If home owners are unable to make their mortgage payments then they risk impacting their credit standing for the two years that this type of information will remain on their files,” Brown says.

Twitter @jcollett_money

Posted by John Collett – Money Manager – Fairfax Digital on 17th November, 2013