Nearly 1 in 3 households are in mortgage stress. Can you afford an interest rate hike?

Recent data has indicated that mortgage stress and defaults are set to increase this year. Information gathered by Digital Finance Analytics states that over 29% of Australian households are experiencing mortgage stress and if interest rates rise, a possible 54,000 Australian households are at risk of defaulting over the next year. Are you one of them?

Can you afford an interest rate hike? Take the test...

1. Add an extra 3% to your current interest rate below
2. Enter your remaining loan amount and loan term

Results:

• Will you struggle to afford these extra repayments?
• Is your new repayment over 30% of your household income?

If you've answered yes to either of these questions you may be at risk of mortgage stress. However, there are still lots of options available to you. Chat with a Home Loan Specialist today for free expert advice.

6 Tips to avoid unnecessary stress

#1 Consolidate your credit cards or other loans

Think about consolidating your higher interest debts like credit cards, car loans and personal loans into your home loan. Rolling all of your debt into one regular repayment and can help reduce your overall repayments. This can mean the interest you pay on your credit card can drop from 20% to 4%.

#2 Prepare for interest rate rises

Don’t expect interest rates to remain low. Consider your ability to make repayments if your interest were to increase by 2 or 3 per cent. Try to make extra repayments when you can, keep your credit file clean and make sure that you keep your finances in order by budgeting.

For example, if your 4 per cent interest rate (on a $500,000 loan, with a 25 year loan term) jumped to 6 per cent, your monthly repayments would increase by $583. If your rate increased by 3 per cent, it would mean you can expect to pay an extra $895 each month.

#3 Buy a home you can afford

These days Australia is property mad and auction bidding can escalate quickly, but try not to spread yourself too thin. If you're buying, you'll need to factor in closing costs (e.g. stamp duty) and you'll need to prepare yourself for possible rate rises. Don’t get starstruck by your dream home or pushed into something by a real estate agent.

Struggling with repayments? Switch to a better home loan and save.

#4 Shop around for the best deal

Interest rates change all the time. Try to always make sure that you always have the best deal. Our Lendi data shows that, based on an average Australian home loan of $371,100, households could save up to $162,458 over the life of their 30-year loan by simply negotiating or switching lenders to get the best rate available.

This equates to a saving of $5,412 each year in repayments. When circumstances change and interest rates rise, every penny you save counts!

#5 Consider putting extra funds in an offset account

By keeping cash, such as your salary, in an offset rather than savings account you can automatically reduce the total amount you are paying interest on each month. For example, if you owe $500,000 on your home loan and have $30,000 in an offset account, your lender will only charge you interest on $470,000. This is a small move that could save you thousands in the long run.

#6 Protect yourself from unforeseen circumstances

There are a few types of insurance that can help you prepare to expect the unexpected. These include income protection insurance which can provide a percentage of your income if you are out of work due to illness or injury.

In the case of death, life insurance can provide surviving family members with the finances to continue meeting home loan repayments and avoid selling the family home.

How do you know if you're experiencing mortgage stress?

If you’re experiencing any of the following, it’s quite likely you’re experiencing mortgage stress:

• If your home loan repayments are more than 30% of your salary
• If you are worried about coming to the end of your interest only period
• If you struggle to pay household utility bills
• If you can’t afford to pay more than the minimum on your credit card payments

Why do borrowers default?

There are a number of reasons borrowers experience mortgage stress:

1. Divorce or separation: This is the most common reason because nearly 50% of long-term relationships break down.
2. Illness or unemployment: Sometimes the unexpected happens and a sudden loss of income can bring home loan repayments to a standstill.
3. Unexpected death: Funeral and burial costs can be a significant burden on families as well as the loss of income if the deceased family member was paying a portion of the mortgage repayments.

Don't let your credit score hold you back from your dream property. Compare home loan rates in seconds.