Incomes could have just as much impact on mortgage stress as the rising cost of living, according to Standard & Poor’s.
While Standard & Poor’s agreed that the rising cost of living would inevitably put greater stress on borrowers, a new report by the ratings agency found that not all mortgage stress is being borne exclusively by lower income borrowers.
“In our opinion, for middle-to-higher income earners, the income characteristics of borrowers is another key factor that may influence mortgage affordability, possibly even more so than living cost assumptions,” the report read.
“While income growth can offset rising costs, a drop in income may put significant pressure on certain borrowers. For middle-to-higher income earners, we believe that the Henderson Poverty Index (a measure widely used by lenders in Australia to estimate living costs to qualify borrowers for housing loans) does not reflect these borrowers’ typical lifestyle choices and resulting costs of living.
“When qualifying borrowers, most lenders also incorporate a minimum net surplus ratio in their calculations to allow for potential escalation in costs of living and/or interest rates. Nevertheless, we have found that neither cost of living nor interest rate increases erode the net surplus ratio as quickly as a drop in the borrower’s income.”
The report found that any changes to income could have a much more significant impact on mortgage affordability and stress in the middle-to-higher income borrower categories than rising living and/or interest costs.
These borrowers tend to have a greater component of variable income in the form of incentives, bonuses, commissions, and investment income. Anecdotal evidence during the financial crisis suggests some incomes were reduced as variable pay components were scaled back and/or underemployment increased as working hours were reduced in certain instances.