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Article

Mortgage Stress - 8 Ways to Beat It

21-07-2009

An expansion of the so-called middle class occurred after World War II in Australia. These were people who had discretionary use of a significant part of their income after living expenses were met. The country had helped to overcome major threats to world security. A peaceful world made economic growth a reality. The sheer size of Australia and its relatively small population made more land available for new home building than in established cultures such as those in Europe.

The “Great Australian Dream” is Born.

Ordinary Australians saw home ownership as something to which they could realistically aspire. In fact, by 1965 70% of Australians owned their own home, the largest percentage of any country in the world. This process was actively encouraged by Commonwealth taxation policy, where capital gains on the family home were non taxable. At that time in our history 55% of people on lower incomes and 80% of people on higher incomes were purchasing their own homes.

For most it was their biggest and most important investment. This usually necessitated borrowings of several times their annual income and a commitment to repayments over a couple of decades. It was a celebration and acknowledgement of the steady era of prosperity which followed World War II for at least 20 years.

The baby boomers grew up in these houses. Most of them remember not only this physical environment, but also the sense of community with which it was associated. They lived in a “street”, where kids did stuff after school and dreaded being called inside to eat. There was a certain nostalgic attachment to the notions of family, security and community associated with this era of our social history. The Australian dream included images of the Hill’s hoist, Victa mowers, backyard cricket and barbeques. The annual family holiday to the beach was also part of this.

This post World War II attitude to home ownership was occurring in an “idyll” of steady economic growth which was temporarily uncomplicated by dramatic change in technological areas. The benefits of having your own place seemed clear. First was a sense of stability, in a house which you called yours (even if the bank owned a lot of it) where the kids could grow up. This was a sound financial investment, where the economic future seemed positive and predictable. There was the sense of personal success, with the house being a major symbol of this. The first house was often a stepping stone to a bigger investment which would realise even more capital gains. In rented accommodation you could be evicted. This seemed much less likely if one invested in a house. For the wealthy amongst us the family abode became tangible evidence of their economic status.

By the 1970’s the so-called “extended Australian dream” had become a reality. The free standing three bedroom home on a quarter acre block now also contained a swimming pool and a second car. People also aspired to owning a beach house and having an annual overseas holiday.

The World Changes

However, dramatic change was afoot. Alvin Toffler’s so-called “third wave” of major change in human evolution occurred somewhere in the 1960’s. Having taken thousands of years to develop first an agrarian revolution (where systematic cultivation of crops occurred) and thence to the industrial revolution there was an exponential increase in change which began in the 1960’s. Toffler calls this the “technological era”. As a result of dramatic improvements in communication the flow of capital world wide was facilitated. The process of “globilisation”, where many markets were opened, soon increased in pace.

The Global Financial Crisis

Fast forward to the sub prime mortgage situation in USA in 2007/08. People couldn’t afford to pay their mortgages, having borrowed way too much, then finding themselves retrenched. In the USA people simply “return the keys” of their mortgaged house to the bank, which now owns the house. Then begins a parody where streets are filled with empty houses. They are worth nothing like the inflated valuations used to justify borrowings on them. The first domino falls in the global financial crisis. This is a far cry from the idyllic picture of life in the Australian suburbs in the 1960’s.

It is in this context of crisis and change that we now consider the psychological implications of having a mortgage for Australians.

Changes in Houses and Their Ownership

There has been a change in the pattern of home ownership since the 1990’s in Australia. It has become a much more exclusive club with fewer Australians able to afford houses. There has also been a change in the nature of households. Before 1971 only 15% of houses contained more than 4 bedrooms. In 2001 that figure was 30%. At the same time that this was occurring, the number of people living in each household in fact began to decline. Between 2001 and 2006 the average number of people living in each house fell from 2.6 to 2.2 people. There is the picture of people ratting around in large McMansions.

75% of Australians currently live in urban settings. In Sydney the nature of housing varies according to the distance from the capital CBD. In the outer suburbs houses are more likely to be free standing and to contain families with children and to be owned by the occupants. Closer to the CBD, apartments and unit blocks are more common and these are more likely to be rented and not to contain children (Australian Bureau of Statistics, 2004).

Mortgage Stress and its Consequences

Earlier this year Choice magazine studied the issue of so-called “mortgage stress”. This occurs when more than 30% of after-tax income is consumed by mortgage repayments.

Despite a 3% decrease in cash interest rates (as determined by the Reserve Bank) during 2008, 635,000 Australian households were experiencing mortgage stress in December 2008. This is a startling figure. This means that nearly 2,000,000 Australians are directly effected by mortgage stress. This is occurring in the context of the global financial crisis and rising rates of unemployment. Mortgage stress has serious personal psychological sequelae.

Many Australian households supporting a mortgage require 2 incomes to maintain repayments. A large mortgage will inevitably lead to reduced family cash flow. This places limitations on our choices regarding quality of life issues eg. holidays, sports, pastimes. People living under financial strain are the very ones who need these choices as a way of balancing work and financial stress.

This situation is amplified when one wage earner becomes unemployed, further reducing available cash and resulting in so-called mortgage stress.

Unemployment itself constitutes a formidable adverse life event. We identify with our work and the structure and social connections it provides. Studies in the 1970’s and 1980’s demonstrated increased rates of depression and anxiety amongst the unemployed. This has a ripple effect upon family cohesion, especially when things are complicated by drug and alcohol abuse. Governments have attempted to address this issue financially, but handouts are never as psychologically effective as active engagement in paid work.

Given the cultural importance in Australia of home ownership, a failure to be able to make mortgage repayments is interpreted by many as some fatal personal flaw. The necessary move to an alternate suburb in rented accommodation is also a major adverse life event. It involves a totally new social situation, with different geography and public transport (or the lack of it). The kids have to attend a new school with all that this entails.

Living with the Parents

Often the move will be to the home of one of the parents. This is particularly difficult, especially where space is at a premium. People have usually spent years striving for independence, only to find themselves back under the parental roof. There is a sense of being beholden to the parents, which gives the parents a right (understandably) to dictate terms. This is difficult to manage, especially where a family has been living independently for years. Relationships can be difficult to conduct where there are financial constraints, let alone where there is scrutiny by potentially judgmental parents or parents-in-law. For the parents’ part, there is the obvious intrusion upon an independent lifestyle they had established over years.

Not surprisingly, rates of psychological disorders increase in the face of adverse life events. Depression and anxiety are the “big ticket” items here. Both are associated with increased risk of suicide and are often self treated with drugs and/or alcohol. There is a sinister effect upon family cohesion where one or both parents is depressed or anxious. This has the potential to precipitate marital breakdown and all that it implies for all members of the family.

Meanwhile one or both parents are often trying to hold down a fulltime job. Well intentioned advice and articles about work/life balance find little meaning for people struggling to survive financially and personally. Yet, these are the very people most adversely effected by the stress of work and finance.

Once the downward spiral from mortgage stress has begun, the process is difficult to arrest.

Dealing with Mortgage Stress

There is usually a lead time before the sequelae of mortgage stress are apparent. However, people involved have had this “hanging over their heads” for that entire time. It constitutes a constant daily worry and one which is difficult to express or share with others, due to the associated sense of shame. So, how best to deal with mortgage stress on a personal level?

Find a financial advisor you trust and lay the cards on the table. They can help you re-negotiate the terms of your mortgage (which is your right at the time of financial hardship). It is of interest that in Australia lenders are under no obligation to explain this right to people borrowing money.
Where hard decisions have to be made eg. about selling and moving to a more affordable area, make then early rather than later. This can result in large cost savings eg. on interest paid in the interim.
Avoid “future tripping” as much as possible. Future tripping is where we imagine the worst case scenario. We effectively experience this “as if it were happening”. This will be all the more pessimistic if depression is an issue. Focus instead on what you can solve today.
Pay attention to exercise and diet. Now, more than ever, you need your wits about you. Mental efficiency will be improved if physical wellbeing is attended to.
Try to make a list each day of about 5 matters to be attended to. This is best done late in the day because your brain will work on it while you are sleeping overnight.
Avoid drugs and alcohol. The costs far outweigh the short-term benefits.
Spend as much time as you can with the family and people you are close to. Try to nurture these relationships. They provide enormous psychological support.
Beware depression and anxiety. Discuss how you are feeling with your GP, if even a bit of your brain suspects life is becoming hopeless or filled with terror at the thought of an unpredictable future.

The Great Australian Dream was symbolic of a young nation’s post war success and stability. An increasingly changeable and unpredictable world has evolved over the past 4 decades. This symbol of success, for many, has become a source of major personal trauma. Like the other major changes in our world, it demands adaptation if families are to survive.