July 18, 2017
July 18, 2017 | Risk Pulse
Household debt reaches the highest highs: are your clients covered?
The decision by the Reserve Bank to leave the cash rate on hold for the eleventh month in a row has surprised few. Even more unsurprising may be the news that Australians’ level of household debt has reached historical highs, at 190% of disposable income.
These two events are not unrelated. Everyone from the RBA and regulators, to the government continue to reassure the public that the results of their efforts has provided the ‘soft landing’ that the Australian housing market needs. However, this has done little to dampen the dizzying amounts that homebuyers need for just a deposit in many of our major cities.
This has resulted in a huge amount of money sunk in bricks and mortar, with growth in housing debt far outstripping that of household incomes. And while the RBA believes it is doing enough to prevent a housing market crash, the fact remains that interest rates will rise (those for investors and interest-only mortgages have already done so) and when they do, the financial security of many Australians will become increasingly uncertain.
Debt is a powerful weapon
It can build wealth or destroy it. So are Australians in the firing line?
Stats from a recent analysis of Moneysoft’s real-world client data suggest there is cause for concern. Their figures reveal that slightly more than one-quarter of mortgages classed as “unhealthy” because they had increased in size by at least 5% over the history of the loan1.
Just over one-quarter were “neutral” (loan balances were steady) leaving slightly less than half of all loans classed as “healthy” (the loan size had decreased by at least 5 per cent).
Underinsurance remains a problem in Australia
Adding fuel to the fire, recent research from Rice Warner also shows that the median level of life cover of Australians only meets 61% of basic needs (defines as the minimum required to pay all non-mortgage debt and sustain their current living standard until age 65 or until children reach age 212).
Furthermore, median life cover is only 37% of income replacement level, and the median levels of TPD cover and income-protection cover meet only 13% and 16% of their respective needs.
The harsh reality is that in the event of an accident or illness, Rice Warner estimates that 80 percent of Australians would not receive enough from the median pay out to last years.
The underinsurance gap for parents with young children is even greater than suggested by the median levels of insurance cover.
A couple aged 30 with young children needs the equivalent of nine to 12 years of income for the higher-earning partner to provide a basic level of life insurance protection for the family. Yet same family needs the equivalent of 17 to 21 years of income for the higher-earning partner to provide an income-replacement level of life insurance.
Time for a financial health check?
With debt levels clearly on the rise and underinsurance still a real problem, there has never been a better time to check in with clients to ensure their cover still provides adequate protection for their circumstances.
Helpful questions to ask are whether any of your clients have been climbing the property ladder, either moving to a bigger, better house, or perhaps acquiring an investment property. In either case your client may have taken on more debt and need their cover reviewed, especially if they live in a big city.
1 Shaw, J, ‘Tick, Tick, Tick: Is there a debt bomb set to explode?’, Professional Planner, December 2016.
2 Australia’s Relentless Underinsurance Gap, Rice Warner, September 2016.