Mortgage stress refers to a household that is struggling to cover the costs of mortgage repayments and other expenses. More specifically, it is usually defined as a household that is spending more than 30% of their pre-tax income on mortgage repayments.
Mortgage stress is not uncommon and it doesn’t just affect low-income earners. Information gathered by Digital Finance Analytics in June 2021 revealed that almost 42% of households in Australia are affected by mortgage stress. With NSW recording the highest percentage of households under financial stress, while areas of Melbourne, Sydney and the Gold Coast were found with a large amount of investor stress.
How is Mortgage Stress Calculated?
If you are spending more than 30% of your gross household income on home loan repayments, you could be under mortgage stress.
For example, if a single-income household earns $4,500 per month and makes monthly mortgage repayments of $1,500, that household would be considered under mortgage stress. $1,500 is more than 30% of $4,500, which puts a lot of strain on other expenses such as food, utilities and transport.
However, the 30% rule is not always applicable. Some high-income earning households may be able to put more than 30% of their income towards the mortgage and still comfortably afford other expenses. In other circumstances, someone might be spending less than 30% of their income on their mortgage but still struggling under financial strain.
Additionally, the 30% rule doesn’t take into account that a household may be choosing to make larger repayments in order to pay the mortgage off faster. If a household is under financial strain, it will most likely be quite clear, especially if they’re struggling to make their regular mortgage repayments.
What Causes Mortgage Stress?
Mortgage stress could be caused by any one of a number of factors, including:
- A rise in interest rates - If there is a sudden or drastic increase in interest rates, this could affect the ratio of mortgage repayments in a household. This is more than relevant with the recent and upcoming interest rates.
- Unexpected expenses - An unforeseen circumstance, such as a sudden injury or illness, could take a large chunk out of the borrower’s capacity to make repayments.
- Borrowers taking out a loan they can’t comfortably afford - Many borrowers are tempted to take out mortgages that are right at the limit of what they can afford, in order to live in a nicer location or have more space. However, this can quickly start to put a lot of strain on their finances, especially if something changes.
- Income or employment loss - A lost job or a cut in wages could drastically affect a borrower’s ability to pay their mortgage
- Spending/lifestyle habits - Consistently living beyond their means could put a borrower in hot water.
Mortgage stress can affect both low income and high income earners, as anyone could be affected by financial change or difficulty.
What You Should Do If in Mortgage Stress?
There are a number of strategies you can use to help manage your mortgage stress. First of all, you may wish to speak to a financial counsellor on the National Debt Helpline, especially if you’re feeling overwhelmed. You may also wish to contact a qualified financial adviser for some more in depth advice.
If you are struggling to meet your repayments you can apply for a hardship variation. This means applying to change the terms of your loan due to financial hardship. To do this you’ll need to contact your lender’s hardship office.
In order to apply for a hardship variation you must have a 'reasonable cause' for financial difficulty, such as illness or serious injury, and you need to show that you will be able to repay the loan if the requested change is granted.
You should speak to your lender or relevant credit provider about what changes you could make to your mortgage to ease some of the financial strain. Some strategies to manage mortgage stress include:
- Reduced repayments - You may be able to temporarily reduce your repayment amount or change the frequency of repayments.
- Access extra funds - If you have an offset account or redraw facility attached to your home loan, you may be able to access some of these funds in order to cover repayments.
- Swap to interest only repayments - You may be able to swap to an interest only loan option for a set period of time.
- Restructure loan - You may wish to stay with your current lender but move from a fixed to variable interest rate or vice versa, or renegotiate the terms of the loan, such as the loan period.
- Refinance loan - You could also consider refinancing with a different lender if you find a more competitive interest rate. It’s important to consider that this option might include break costs and upfront fees, however many lenders offer cashback incentives.
How to Avoid Mortgage Stress
1. Buy Within Your Means
It’s not uncommon for someone to take out a mortgage that is at the upper limit of what they can afford, but this is generally not a good idea. The bank may approve you for the loan based on your credit score and expenses history, but you should consider how much pressure you want to place on your household finances with your mortgage.
Financial stress can affect your mental and physical health if it becomes overwhelming, so it's important to try and reduce your chances of experiencing mortgage stress.
It’s best to take out a loan that requires you to pay 28% or less of your gross income towards your mortgage, even if this means you can’t have your dream home.
2. Be Proactive With Your Home Loan
It’s good to get into a rhythm when it comes to paying off your mortgage, but it’s also good to make sure you’re taking advantage of all the options available to you. Every once in a while, it might be a good idea to review the terms of your home loan and consider refinancing to get a better deal.
3. Regularly Update Your Budget
It’s important to continually update your budget as your financial situation evolves and changes. Sometimes people spend more on certain items when they can afford it and then don’t realise that it has become a habit.
Large expenses such as educational fees or vacations may also require you to rework your budget. Ideally, you should be able to comfortably make your mortgage repayments and still save 10-20% of your income.
4. Minimise and Limit Other Debts
A mortgage is a huge expense and it’s important to prioritise paying this off before weighing yourself down with more debt, such as a personal loan or car loan. You should avoid using buy-now, pay-later services because these can throw your budget off balance, and don’t take out more than one credit card.
5. Set Up a Redraw Facility or Offset Account
An offset account is a separate account that allows you to offset the balance of your home loan with the balance in this account. This means that you save money on interest, because you don’t pay interest on the part of your loan that is offset.
For example, if the balance of your mortgage was $600,000 and you had $20,000 in your offset account, you’d only be charged interest on $580,000.
Having a redraw facility gives you access to any extra repayments that you’ve made on your home loan. This option also helps you save on interest and can motivate you to pay off your home loan faster. Both of these options can give you access to extra money when you need it, which could be a lifesaver if you find yourself experiencing mortgage stress.
6. Use Joust Instant Match
If you’re considering refinancing your mortgage, Joust Instant Match is a great place to look for the most competitive rates on home loans. You’ll be connected to lenders who suit your individual circumstances, which could help you save money on your home loan.