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What mortgage stress is and how to avoid it

With Australian property prices higher than ever and the effects of the pandemic still lingering, more property owners are experiencing mortgage stress.

In this article, we’ll explain what mortgage stress actually means, why it’s a big problem, how to manage it, and how to avoid it in the first place.

What is mortgage stress?

Mortgage stress is a term with a number of different meanings, depending on who you ask. Some definitions describe it in more general terms, such as increased home loan repayments leading to stress on household finances. Others describe it more specifically as when a household spends over 30% of their pre-tax income on home loan repayments.

Sadly, mortgage stress is not uncommon. Information gathered in June 2021 by Digital Finance Analytics has found that 41.33% of Australian households are experiencing mortgage stress. This figure has increased over the past couple of years, likely due to the impacts of COVID-19. Yet other sources suggest that the numbers may be different.

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How to know if you’re in mortgage stress

If you feel like your mortgage is more of a burden on your life and financial wellbeing than it should be, there’s a good chance that you are facing mortgage stress. Borrowers who are feeling overwhelmed by their home loan repayments can calculate what percentage of their income goes towards these repayments. If it’s over 30%, you’re at risk of mortgage stress.

Mortgage stress isn’t something that just affects low-income borrowers; high income borrowers can be at risk too. And even if your mortgage repayments don’t exceed 30% of your combined household pre-tax income, you can still experience mortgage stress. For example, if there are other expenses in your life that increase or are introduced, your financial situation can drastically change.

Why is mortgage stress a problem?

It’s pretty obvious that mortgage stress is a situation that no homeowner wants to be in. Beyond creating pressure to meet your repayment obligations, mortgage stress can leak into your personal life. It can also be debilitating for your physical and mental health, personal relationships and decision-making capacity.

When someone is in mortgage stress, they are more likely to make irrational decisions. For example, taking out high-interest loans or making ill-thought-out investments. It can damage interpersonal relationships and lead to relationship breakdowns between partners and family members.

For all these reasons, it’s important for homeowners and prospective home buyers to take steps to prevent and avoid mortgage stress. We’ll provide some tips for this later in the article.

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What causes mortgage stress?

Mortgage stress can happen for a variety of reasons, including:

  • Borrowers taking out very large loans, often as a result of sky-high property prices in Australia
  • Unexpected expenses coming up, or other financial setbacks
  • Income loss and unemployment
  • Borrowers living beyond their means
  • Lack of wage growth across many industries

How do you manage mortgage stress?

While it’s ideal to avoid falling into mortgage stress altogether, it can happen even if you do everything right. So, if you’re in mortgage and are struggling to make your mortgage repayments, here are some suggestions:

  • Review your budget and current spending habits - is there anywhere you can make changes to trim expenses down? If you don’t have a budget, maybe it’s time to create one
  • Consolidate your other debts (e.g. car loan, personal loan and credit cards) under your home loan to avoid missing repayments and benefit from lower home loan interest rates
  • Get a side hustle or find another income source
  • Redraw any extra repayments you’ve made
  • Negotiate a lower interest rate with your lender
  • Refinance your home loan, possibly with another lender
  • Consider looking into home loan repayment deferral if you are eligible
  • Consider making interest only repayments for a while
  • Speak to a qualified financial adviser
  • Get in touch with your lender’s financial hardship support team

How to prevent and avoid mortgage stress

Mortgage stress is usually avoidable with a well planned-out home loan and a rational approach to borrowing. Here are some ways to prevent and avoid mortgage stress:

  1. Avoid taking out unnecessary, high interest loans and credit cards. Your mortgage is already a big expense, so it’s best if you can keep other debt to a minimum
  2. Live within your means and keep expenses reasonable to your income and financial commitments
  3. Don’t take out a loan you can’t afford to comfortably repay. This unfortunately might mean you can’t have your dream house for now
  4. Before applying for a home loan, make sure that you will be able to repay your mortgage, cover general living expenses comfortably, add money to your emergency fund, and to other savings accounts
  5. Make sure you can handle a possible interest rate rise
  6. Look into debt consolidation if you have other loans and credit cards in addition to your home loan
  7. Take the time to find a competitive, suitable home loan deal that you can realistically manage. While lenders are obligated to lend responsibly and make decisions in your best interests as a borrower, this doesn’t always happen in the way it should. A good mortgage broker can help you find the right loan for you and help you avoid difficult situations.

If you think you’re at risk of experiencing mortgage stress, it might be worth reassessing your home loan. Lendi’s Home Loan Specialists are on hand to provide free, expert advice. Get in touch today for more information.

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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.

Tags: investing, investment, investment property, extra repayments, interest only repayments, loan repayment, minimum repayment required, mortgage repayment, principal repayment, reduced repayment, repayment holiday, interest only, refinance

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