Climate Change and the effect on your mortgage
The impact of climate change is becoming more apparent with increased frequency of natural disasters such as floods, bushfires and storms. But what many are yet to realise is that this phenomenon is now having a very real effect on mortgage holders.
A recent report by Moody’s Investor Services has found that the increase in natural disasters over the past decade poses a risk to mortgagors, the property market and mortgage-backed securities.
Primarily, the impact of a natural disaster can cause disruption to economic activity, affecting borrowers’ incomes thus potentially resulting in mortgage delinquencies and other financial losses. In the wake of Cyclone Debbie in 2017 as well as the NSW floods in 2016, a notable increase in mortgage delinquencies were documented. Delinquencies can be kept in check with the with the use of home insurance and loan protection insurance as well as financial relief provided by financial institutions and government, but job losses as a result of a disaster may incur a more lasting financial impact to a mortgage holder.
Another unfortunate consequence is that property in areas vulnerable to disasters may be subject to significantly higher insurance premiums or at worst uninsurable. Therefore, those mortgage holders in areas prone for extreme weather are at risk for defaulting in the event of hardship caused by a natural disaster due to the inability to maintain adequate cover for the worst-case scenario. Its therefore prudent to review the terms of your insurance should you believe you hold property in an at-risk area.
Property values are also a major consideration when it comes to the effect of natural disasters. Values may be impacted due to direct destruction or as a result of being in a vulnerable location. This may in turn impact the buoyancy of the property market and investor confidence in the surrounding areas, having a snowball effect on the economic activity in the locality.
It’s fair to say that this is perhaps just the beginning of what financial burdens property owners are potentially faced with as a result of climate change. Whether you own a property in an area of concern or not it’s still important as global citizens to consider what impact our own choices have on the planet and the legacy we leave.