If you’re a homeowner, it’s pretty common for your home loan to be your biggest monthly expense.
But what if this expense starts to become overwhelming? You might be at risk of mortgage stress.
In this article, we’ll explain what mortgage stress is, how it’s affecting Aussie households, plus how rising rates could worsen mortgage stress across the country. We also give tips on how to avoid mortgage stress before it happens and how to manage if you do experience it.
There are a few ways to understand mortgage stress, depending on the context in which the term is used.
In some instances, mortgage stress refers to when a household spends more than 30% of its pre-tax income on home loan repayments.
It can also refer to when a borrower experiences stress or has difficulty managing their home loan repayments – regardless of how much income these repayments represent.
Recently released data from the 2021 Census has revealed that 14.5% of households spent more than 30% of their income on home loan repayments.
This number is actually down from 2016, when Census data reported that 19.3% of households were experiencing mortgage stress.
However, it’s possible that because the economic conditions of the COVID-19 pandemic across 2020-2021 were favourable for borrowers, rates of mortgage stress dropped.
For example, interest rates hit an all-time low in November 2020 and stayed that way for 18 months. Government help for first home buyers also accelerated. So, despite soaring property prices, more people were able to jump onto the property ladder for the first time.
The cash rate had previously sat at 0.10% since November 2020, its lowest ever. Since then, inflation has climbed and the cost of living has been putting pressure on household budgets.
Raising the cash rate – which hikes up interest rates – discourages people from borrowing money for things like housing. This ultimately dampens demand, which reduces prices and brings inflation under control.
So, it’s possible that given the recent rises in the cash rate – as well as those predicted for the rest of 2022 – rates of mortgage stress could rise.
Many mortgage holders will have financial buffers to help them with interest rate increases – maybe you’ve been making extra repayments and you’re ahead on your home loan.
For many borrowers who bought property in the last couple of years while interest rates were extra low, increased interest rates might come as a bit of a shock.
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Maybe you were one of the many borrowers who took out a large mortgage while interest rates were at historic lows, or perhaps you just want to stay on top of your mortgage and your finances.
Whatever your situation, it’s a good idea to know how to prevent mortgage stress before it can come about.
Keeping on top of your home loan can help you identify any areas where you might be able to save.
For example, you might notice that you are paying fees for an offset account, but you aren’t using it or the savings in interest don’t outweigh the fees you pay.
Or, you might realise that fixing your interest rate could bring some stability to your financial situation.
Either way, it’s probably a good idea not to set and forget your home loan. You could be paying more than you need to.
If you find that your mortgage isn’t quite up to scratch, it might be time to search for a more competitive deal.
Let’s say you work out that your lender is offering new customers a lower interest rate, or you can find a lower interest rate with another lender.
You might decide to negotiate a reduced interest rate with your lender by asking them to match what rate new customers are receiving.
Or, you might do some research and compare home loans with other lenders to find a loan that could save you money and better suit your needs.
If you start to feel like your mortgage could become overwhelming, you might want to take a look at your household budget.
Are there any expenses that you could cut back on or eliminate? Maybe you could find a better deal on home and contents insurance or reduce your spending on online shopping for the time being.
Do you have credit card debt, a personal loan or a car loan?
Consolidating these debts into your home loan creates one streamlined monthly repayment.
Since home loan interest rates are typically lower than interest rates on debts like credit cards and car loans, you could also end up paying less in interest overall.
Roll your credit card, car or personal loans into your home loan.
You may find yourself experiencing mortgage stress even after taking the above action, but there are things you can do to help your situation.
Do you have an offset account or redraw facility with your home loan? You could tap into the money you have in your offset account or redraw your extra repayments if your mortgage starts causing you stress.
It can be reassuring to know you have extra cash flow you can access to help manage your home loan repayments.
However, it’s important to note that this might not be a long term strategy to deal with mortgage stress.
It could be a good idea to chat with your lender or a financial advisor to get on top of your home loan for the long run.
When you start to feel like your home loan is becoming overwhelming, it could be smart to get in touch with your lender to talk about financial hardship arrangements.
Your lender will work with you to find a solution that suits your needs. This could include taking a repayment holiday, reducing your interest rate temporarily, lengthening your loan term or changing your repayment frequency.
Talking with a qualified financial advisor might be the way to go if you’re experiencing mortgage stress.
A financial advisor can help you get to the root of the issue and make a plan to get to a place of financial stability.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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The Lendi Group Pty Ltd, which is the ultimate holding company of the Aussie and Lendi businesses is owned by numerous shareholders including; banks such as CBA, 1835i (ANZ’s external venture capital partner) and Macquarie Bank, the Lendi founders and employees, and a number of Australian institutional investors and sophisticated investors including UniSuper.
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