Borrowers holding large home loans, investments loans as well as credit cards, car loans etc – are caving in under the pressure of huge debts. Unfortunately property values are down and those who would like to seek stress relief through debt consolidation, find that they are unable to qualify for a mortgage refinance because they no longer hold the equity in their property that they did some years earlier.

A popular definition of mortgage stress is when your home loan repayments take up more than a third of your disposable income, although some financial experts see things differently.

Over the first 10 months of 2011, there was little movement on interest rates, however economic conditions were poor with many borrowers loosing employment and consequently being unable to pay their mortgages.

Australian Bankers’ Association chief executive Steven Munchenberg disagrees with the third of disposable income theory.

“At some levels it may be appropriate, but a lot of high-income earners will have more than 33 per cent of their disposable income paying for their big fancy houses, but they’re certainly not in mortgage stress and not doing it tough,” he says.

Measuring mortgage stress and defining it is difficult because individual circumstances vary so much, Munchenberg says.

“Someone whose mortgage is fine may be going out getting a pile of credit cards and not telling everybody the full story. They can be carrying a huge credit card debt, so their total debt is a problem.” Therefore sometimes debt position overall is a bigger problem than just the home loan.

The Australian Bankers’ Association has just launched a website, doingittough.info, which helps people who feel they are losing control of their finances. It has information about dealing with financial hardship, legal rights, a budgeting tool, a financial health check and details about applying for help from your bank if the debts become too much.

It will be more and more difficult for banks to maintain the expected levels of profitability while meeting the expectations of borrowers.

Profit margins will decline as home loans – the lifeblood of the Australian banking industry – become less profitable, according to a recent report from Deloitte.

In its 2012 report on the state of the mortgage industry, released yesterday, Deloitte said consumers may benefit in the short term.

But it warns they may ultimately pay a heavy price as the number of players in the home loan game will drop significantly.

“Price wars will likely continue in the short term,” Deloitte national banking leader Rick Porter said.

“While such price competition may be a good outcome for borrowers in the short term, it does make it more difficult for competitors to emerge and potentially stifles innovation and other benefits that come with a broad base of competition.”

Australia’s total value of home loans is $1.2 trillion. But it is only growing at 6 per cent a year – the lowest growth rate in two decades, the report said.

As Australian population continues to age, home owners will look to downsize their homes.

Teamed with the growing trend for households to consolidate debts, pay down loans, and save money, banks will find it “challenging” to grow their mortgage books more quickly without poaching customers from rivals, he said.

Deloitte senior banking partner Graham Mott, also an author of the report, said banks would start feeling the squeeze on margins in the coming year. The bulk of the home loan business will come from refinance activity.

The solution was for lenders to seek revenue streams from insurance operations and other businesses.

Over the next two years, net interest margins – a key measure of a bank’s ability to profit from lending – will slide from 2.2 percentage points towards 2 percentage points.

Banks will struggle to meet the expectations of borrowers by offering the cheapest home loan deals while still remaining profitable.

It was nice to see that most lenders had passed on the rate reduction in full and almost immediately – making variable rate home loans cheaper for the first time in quite a while.

Lenders are still very keen to entice new borrowers to join them by refinancing their home loans, car loans, personal loans and any other debts.

Some lenders are also offering borrowers incentives such as a free holiday or a cash back amount in order to win their business.

All this in addition to the abolition of exit fees, which came into effect from July 1.

Competition among lenders is enough to get people to at least look at their existing home loans with a view to refinancing.

The lowest amongst fixed-rate home loans is the three years home loan from Suncorp at 5.99 per cent, according to Infochoice. The lowest one-year fixed rate is from Newcastle Permanent at 5.94 per cent. The lowest variable rate is from UBank at 6.39 per cent. This includes a loyalty discount of 0.2 per cent for the first 1000 customers who are refinancing.

As households started to save more and spend less, the demand for loans eased and costs of loans began to decline.

“Consequently the interest rates on new home loans are now around 10–15 basis points lower than they were early in the year,” said Mr Battellino to Citi’s annual Australian and New Zealand Investment Conference in Sydney.

While Australia did not go through the kind of extreme fallout of the GFC that America and Europe were subjected to,  consumers quickly became aware of the risk associated with extreme levels of debt and over the past several years Australians started to pay down their debts and commenced saving more and spending less.  The unemployment rate in Australia is currently 5.2 per cent compared to 9.1 per cent in the US and 8.1 per cent in the UK.

Mr Battellino said that, “After a 10–15 year period during which households increased their levels of debt and reduced their rate of saving, they have returned to a more conservative and traditional, pattern of financial behaviour.”

The resulting shift has pushed household credit growth slightly below household incomes, while the savings rate has returned to normal based on historical standards, said Mr Battellino. The wariness is creating headwinds for businesses that rely on healthy spending and borrowing, he said, in the speech entitled “Economic and Financial Developments.”

Banking analysts have been predicting that profits at Australian banks will come under pressure as a central area of business, mortgage lending, slows in growth.

While lower levels of spending as well as lower borrowing are creating a difficult business environment for most industries, this is having a positive impact on costs of home loans.

The figures from the Australian Bureau of Statistics (ABS) indicate that the number of home loans to owner occupiers has increased by 1.2 per cent, while the value is up by 0.6 per cent.

The value of home loans to investors was 1.8 per cent higher during August.

Despite the small increases the levels of home loans taken out today are well below anything we have seen in recent months and even years.

The value of home loans taken out by home owners increased 6.4 per cent from August 2010, equivalent to an additional $876 million per month, but this is more than explained by the rise in refinancing transactions, which are running at about $1 billion higher than a year ago.

Excluding mortgage refinance, the value of new home loans taken out by home owners during August was down 1.5 per cent, or $152 million per month, from August last year.

This seems to confirm that home loan borrowers are still doing all they can to consolidate debts and refinance to a cheaper home loan.

The awards, hosted by Mozo, an Australian financial comparison website, requested that Aussies rate 201 financial providers on their service, savings and home loans.

ING DIRECT was voted Australia’s Best Bank for the second year in a row for its great value services such as savings accounts, and home loans. ING Direct was also picked as Australia’s most trusted bank, over CBA, Westpac, ANZ and the like.

Greater Building Society and ME Bank, who were voted as the providers of Australias Best Home Loans .

Borrowers were impressed with both lenders for not increasing their interest rates above the 25 basis points increased by RBA last year – consequently offering borrowers well priced home loans, without gimmicks an misleading advertising.

National Australia Bank took out the top gong for Australia’s best big bank.

Home owners are making every effort to save by refinancing to a cheaper home loan as well as consolidating their unsecured high cost debts into their mortgage and enjoying the savings.

Many lenders big and small have some very competitive offers on rates, fees and switching incentives, and people who already have mortgages are seeing the benefits of reviewing their arrangements

Certainly in times of financial hardship and uncertainty more people are looking at ways to make a saving on their largest costs – one of these is your home loan. Many people have refinanced to save on the interest rate while others looked for savings through debt consolidation.

The Home Finance Index showed that of those looking at borrowing or refinancing in the next three months, 45 per cent would be most likely to select a variable rate loan. The reason behind this is that there seems to be little certainty about the future direction of cash rate in Australia.

Fixed rate home loans continue to be the least popular option (16.3 per cent), and around one in five respondents opted for a mixture of fixed and variable rate. People do not wish to be caught up in an expensive fixed loan while rates may actually start going down.

In an exposure draft review of the Australian RMBS sector, the ratings agency has claimed homeowners are now more vulnerable to interest rate hikes than during the recession of the 1990s, when interest rates were around 17%.

The situation is quite different today than 20 years ago. Most borrowers are carrying a very high level of debt and it would take very little to push them over the line.

Household debt as a percentage of income has increased more than threefold from 49.4% in December of 1991 during the previous recession to 156.4% in December of 2010.During the same period of time interest payments as a percentage of disposable income have gone up from 9% to 11.9%, though current interest rates are less than half what they were in 1991. This significantly exposes borrowers to a risk of default.

Given the high level if debt carried by Australian borrowers today, when combined with declining property values, any increase to home loan rates would have a significant impact on the family budget with dire consequences for the Australian economy overall.

During the the first three months of 2011, Mortgage arrears escalated by 30%. This was due to a combination of interest rate increases announced by most lenders at end of 2010 as well as growing costs of living.

Fitch, which measures the risk level of mortgages that have been packaged and sold as securities, said the proportion of borrowers at least 30 days late was 1.79 per cent, compared with 1.37 per cent three months earlier.

Fitch associate director James Zanesi said the increase pushed delinquencies in Australia’s mortgage-back securities market to the highest level on record.

Low doc home loans have also experienced a very significant increase in home loan arrears and defaults.

Low-doc defaults of 30 days or more went up to 6.74 per cent at the end of March. This was higher than 6.7 per cent in the midst of the GFC.

Many borrowers were significantly impacted by the Queensland floods, while others went overboard on their Christmas shopping and were unable to catch up.

According to Fitch, the arrears figures are worse than expected.

Financial Counselling Australia chief executive Fiona Guthrie is worried that the situation may worsen.

This may not be a once off spike but the beginning of a more serious trend.

Consumer Action Law Centre chief executive Carolyn Bond said mortgage stress went hand in hand with credit card and personal loan defaults and debts.