Mortgage stress is when you are struggling to make your home loan repayments. It also encompasses the other financial stresses caused as a result of an increase in mortgage engagement, especially when this increase is significant in relation to household income.
Much like the dispute over exactly what constitutes a recession, it is somewhat difficult to measure in numbers exactly what mortgage stress is. Different measures often claim that if your mortgage repayments are 30% higher than your income, you are in mortgage stress. However, if you think you’re in mortgage stress, or at least if you are concerned about repayments, you are probably looking to do something about it.
Are you under mortgage stress?
A good measure for mortgage stress is whether you, as a homeowner, are in arrears on your repayments or if you have defaulted. Essentially – whether you have missed a payment. You can even technically be in mortgage stress if you are yet to miss a repayment.
But you might not be in mortgage stress just yet.
Here are some methods to try and avoid it:
- Buy a house within your means. Sometimes it can be tempting to be extremely ambitious when purchasing a home. Whilst ambition in and of itself is fine, sometimes you can run the risk of aiming for an unrealistic goal. Be sure to have a very clear idea of your income and expenses. And know all the terms of your mortgage inside and out. You don’t want to get hurt by an expanding interest rate.
- Make a budget. This is especially important when you have such a massive spend as a mortgage. If you make a thorough budget that you can stick to, you give yourself a much better chance of making your loan repayments.
- Give yourself room to breathe. You always want to have space in your budget. Life happens, and with life comes unplanned expenses. If you suddenly find yourself breaking your budget and have no spare money, you could fall behind very quickly.
- Account for your lifestyle. All of us have spending habits. Some of us like to spend at a whim; whether it be expensive online purchases, sudden trips or other such spends. Of course, these can eat into your budget quickly. So be aware of the kind of money you spend. If you can’t find room in your budget to guarantee both a mortgage and sudden spend, prioritise.
Increases to mortgage stress in Australia
Mortgage stress is often caused by changes to finances. In Australia, the issue is growing because of changes in the economy. The Reserve Bank of Australia recently changed home loan interest rates significantly. This is particularly noticeable as the cost of living goes up with inflation, especially given wage growth is not keeping up with inflation.
There are also a number of other factors:
- COVID-19. Yes, we know, you’re as sick of hearing about it as we are. But with so many economic impacts as a result of the pandemic, making loan repayments has become more difficult for the broader Australian public.
- Loss of job or reduction in income. When your income drops, you will naturally have less money to dedicate to loan repayments.
- Other growing expenses. Maybe you have started or extended your family. You might have had unexpected health concerns. The point is, sometimes our expenses skyrocket and this affects our ability to make loan repayments.
What can you do about your mortgage stress?
There are a number of different strategies you can use if you are under mortgage stress, or are concerned you will be soon. None of these options should be taken as prescriptive, and certainly don’t apply to every situation. You should always discuss your options with a financial advisor before committing to any of these options.
- Refinance. There are plenty of lenders out there. This means there might be one that offers you a better rate. Be sure to identify and consider all fees associated with a shift to a new lender to make a more informed decision.
- Restructure your loan. Lenders don’t want to lose you, as you are a valuable customer for them. Many of them offer a fair amount of flexibility within their rates. You could look to restructure your loan by switching to a fixed arrangement or even a split between a fixed and variable arrangement. Many lenders even have hardship assistance schemes it would be worth discussing with them.
- Pay the minimum amount. You have the option to reduce your current repayments to a lower rate. You can find out all your options by having a thorough discussion with your lender. Always be careful of increased interest rates if you do happen to reduce repayments sizes.
- Cut down excess spending. This is a much less technical piece of advice, but remains important nonetheless. Ultimately, the more money you have on hand, the better chance you’ll have of getting on top of your repayments. This might include going out to restaurants or ordering food regularly. It could mean subscriptions you don’t use (or even ones you do).
- Add an extra form of income. Is there a part time job you could take? Could you do more overtime? These might be possibilities depending on your life situation.
This list certainly is not exhaustive, and you should always be looking for ways to reduce your mortgage stress.