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20% of Aussie households are facing mortgage stress, is a recession coming?

Analysis by finance site Finder.com.au has found that around 20% of Aussie households are struggling make mortgage payments despite the really low interest rates.

Christmas is meant to be a time of cheer, so it’s unfortunate that so many people are facing financial hardship. Apparently the number of people struggling has increased not decreased in recent times.

This obviously isn’t good news for the array of banks on the ASX like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Suncorp Group Ltd (ASX: SUN).

If people aren’t making their mortgage payments it means less cash profit and worse cashflow for the banks in the short-term, in the longer-term it could mean higher bad loans.

NAB analysis shows that household gearing levels are now at 202%, up from 178% in 2010. How much further can households become indebted?

The problem for many borrowers is that while the cost of debt is falling, their income is barely moving year after year when adjusting for inflation. Many households expected to make more money than they are now and it hasn’t eventuated.

What’s the solution?

That’s the $1 trillion question. Finder’s suggestion for borrowers is that they need to shop around for a lower rate, or at least haggle with their current lender.

The RBA may conclude that the only option is to cut rates even further, but that may be unlikely in the next few months considering how hard the Australian property market has bounced back.

Households will probably cut back where they can and hopefully that’s enough. Forced house sales wouldn’t be good for the homeowner, the bank or the economy as a whole.

Perhaps it’s just this time of year and things will improve in the coming months.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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