How to Deal with Mortgage Stress?

Worried about how you’re going to make your next mortgage payment? Unfortunately, you’re not the only one right now. New research from Roy Morgan shows an estimated 762,000 Australians were ‘At Risk’ of ‘mortgage stress’ in the three months to March 2022. This equates to over 17% of mortgage holders.

Being approved for a mortgage is a moment of joy and satisfaction, but you can easily get into mortgage stress if you struggle to manage the mortgage repayments. The current rising cost of living, high energy prices, and slower wage growth rate can affect your ability to afford mortgage repayments. Further, the Reserve Bank’s decision to increase the cash rate to tame inflation can lead to higher home loan interest rates, which can dent your budget and make mortgage repayments a lot more difficult.

Your foremost priority should be to be more disciplined with your money to avoid getting into a situation where you may struggle to meet your repayments. Still, if you find yourself in such a situation, there are plenty of steps you can take to deal with it.

In this post, we will provide you with several useful tips, which will help you cope with the mortgage stress and make your mortgage repayments easily.

What is mortgage stress?

Housing affordability is a major issue in Australia, with recent research showing that on average, Aussies will need to contribute over 40% of their income to make their mortgage repayments. Yet, it is broadly defined that if you spend 30% or more of your pre-tax income on mortgage repayments, you’re likely to be suffering from mortgage stress.

Being in mortgage stress means that you fear your income might be insufficient to repay your mortgage instalments. There could be many reasons for mortgage stress, with the most common being the rise in mortgage repayments or increase in ratio of expenses and mortgage repayments to your income (in other words your living costs increase more than your income).

How to know if you are in mortgage stress?

If your mortgage repayments are equal to or higher than 30% of your pre-tax income, you might be in mortgage stress, but this figure isn’t absolute. For example, if you have a low income and high expenses, paying even less than 30% of your pre-tax income in home loan repayments can overburden you. In contrast, if you earn well and can meet your expenses easily, paying more than 30% in home loan repayments might not hurt you.

Everyone is in a different financial situation, which determines whether they can afford their mortgage repayments or not. But if you are in one of the following, you might be in mortgage stress.

  • You are left with little money to meet your day-to-day expenses after paying off your mortgage instalment or have a high mortgage-to-income ratio.
  • You are worried that if your home loan repayment increases with the rise in interest rates, you might not be able to meet your repayments.
  • You have lost your job or your source of earnings.
  • You borrow money frequently to cover your bills.
  • You have low to no equity in your home.

How to deal with mortgage stress?

If you are suffering from mortgage stress, here is what you can do to manage it – and potentially come out of it in a better position financially.

1- Review your budget

Being in mortgage stress means you are unable to meet your expenses and mortgage repayments. So, you should immediately review your budget to find out which expenses you can cut out. There are plenty of expense-recording apps, which you can use to keep your spending within your budget limits. When you create and follow a budget, you’ll spend each penny of your income strategically and reduce the stress associated with mortgage repayment.

2. Negotiate with your lender

If you’re concerned that you might not be able to meet your next mortgage repayment, contact your lender and see if you can negotiate for a change in your mortgage terms and conditions. Your lender might be able to pause your repayments temporarily to give you some respite and a chance to recover from the financial strain. You can also ask for a lower interest rate or to extend your loan term to reduce your periodic payments. Although be aware that by extending your loan term you’ll likely end up paying more in interest over the life of your loan.

3. Use your redraw facility

If you previously made extra payments into your mortgage, you may be able to withdraw the excess money through the redraw facility. The money from the redraw facility can give you some breathing space in the face of mortgage and financial stress you are facing.

4. Consider refinancing

If your lender is unwilling to offer you a lower rate don’t be afraid to move elsewhere, where you may be offered more competitive interest rates and better overall mortgage packages to alleviate your mortgage stress. However, refinancing may also involve fees such as discharge fees and break fees from your existing lender. The new lender will also charge fees when you secure a new loan, so you need to do the cost-benefit analysis to determine whether it’s a good deal to refinance your existing loan.

5. Opt for debt consolidation

Debt consolidation allows you to package your other loans, such as car loans, credit card loans, and personal loans, into your home loan by refinancing your mortgage. However, you need to have some equity in your mortgage, at least 20% in most cases, to be successful in getting favourable rates for debt consolidation from lenders. Debt consolidation can reduce your mortgage stress as you can save plenty of money in interest charges over the course of the loan term. By packaging all your loans into one it also makes it easier to remember when your repayments are due.

6. Find another source of income

While dealing with mortgage stress, the best way to get out of it may be to find another source of income. You can do a part-time job to earn extra income that can support you in your difficult times or can use the internet to earn some money by selling any wanted goods you may have.  

7. Use an offset account

If you are disciplined with your money, consider using an offset account. An offset account is similar to the redraw account with the exception that the former works like an everyday bank account savings account and gives you easy, instant access to your money. The money in the offset account reduces the interest rate on your mortgage. So, using an offset account, you can save money in interest charges and also use it to pay your bills.

Final Thoughts

Mortgage stress occurs when your income is insufficient to meet your high expenses and mortgage repayments. Stress affects your life in every aspect. But, thankfully, you can get out of mortgage stress and can streamline your finances if you take the steps we mentioned in the post. The tips we mentioned will help you save money, generate extra cash, and reduce your mortgage repayments, ultimately reducing your mortgage stress.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.