Mortgage stress occurs when the average homebuyer spends more than 30% of their income paying off mortgages. In other words, they are struggling to repay their home loan. According to Finder’s Consumer Sentiment Tracker, 27% of Australians are having trouble paying their home loan or rent.
You can be in mortgage stress even if you are still able to make repayments. However, this means that the cost of fulfilling your repayments becomes a serious burden. When faced with mortgage stress, you may be able to reevaluate your expenses and make some cuts. If things get very difficult, you can also get hardship assistance from your lender.
How can I deal with mortgage stress?
Remember, there are steps you can take to make your mortgage more manageable. Sit down with your financial records and get organized.
- Take a careful look at your monthly expenses over time. Are there any obvious expenses you can save like Uber Eats, dinner, Netflix subscriptions, or a gym membership that you hardly use?
- After you’ve analyzed your expenses, create a budget and stick to it.
- Can you find other sources of income? It may sound obvious, but increasing your income will reduce mortgage stress. Could You Get Weekend Work On Airtasker Or Uber? Perhaps you can rent or use part of the space in your property in a variety of ways. Did you ask your boss for a raise? Seriously, it might be worth a try.
- Can you sell something Consider downgrading your car or selling valuable items that you may not need.
- Move your mortgage to interest-only payments. This will significantly reduce your repayments in the short term (more on this topic below).
- Refinance your mortgage. If you’ve just managed to make repayments (and those repayments are principal and interest repayments) then you should be able to refinance your mortgage at a lower interest rate. This can actually save you a few hundred dollars a month or more in some cases.
- Downsize by selling and buying a cheaper home. However, it costs time and money, and you should factor these costs into account and weigh whether or not it is worth it.
As difficult as it is, it is important that you keep paying back your mortgage. Prospective lenders will be reluctant to loan you out if you cannot keep payments on your first loan.
Should I switch to repayments-only until I’m in a better position?
When you are repaying your home loan with principal and interest repayment, switching to pure interest payments can be tempting. Your repayments suddenly get a lot smaller – for a while.
But ultimately, interest loans only cost more because you end up paying more interest. If your financial worries are short-term and you have a plan, switching to interest only gives you breathing space. Note, however, that this is only a temporary solution.
Hardship assistance and repayment leave
Your lender may be able to help you if you are having trouble making repayments. Remember, sometimes it is better to tell your lender as little as possible until you desperately need help. But it is in your lender’s best interests to help you.
Here are two ways your lender can help:
- Hardship regulations. Most lenders have hardship arrangements and can offer advice to help you manage your finances.
- Repayment vacation. Some lenders allow you to pause your repayments for a short “vacation” to help you financially recover.
Am I in the mortgage stress?
You could approach the mortgage stress without fully realizing it.
Do any of the following apply to you?
- I live from check to check and struggle to pay my bills and mortgage on time.
- I recently lost my job.
- I had to borrow money from parents and friends or take out a personal loan to cover normal expenses.
- My mortgage only has interest repayments and I don’t have a lot of equity in the property.
- Financial stress affects my health and personal relationships.
If that sounds like you, you are likely facing mortgage stress.
How can I avoid mortgage stress before it happens?
If you are starting to feel the weight of your mortgage repayments or are about to buy a home and are concerned about mortgage stress then there are steps you can take beforehand.
For current homeowners, follow the steps above: review your spending, cut costs, set a budget, and consider refinancing if you can get a lower interest rate. Now try (if possible) to make additional repayments in order to build up a savings buffer.
For hopeful homebuyers, the following are some of the most important steps you can take beforehand to avoid mortgage stress:
- Think how much you can realistically afford to repay the mortgage. Look at your current expenses, then add the mortgage repayments. If you are currently paying rent, consider how much more expensive a mortgage would be. Use our credit performance calculator for careful planning.
- Buy a property that you can afford. When you know what you can afford, stick with it. Don’t go over this budget. If you don’t get what you want, consider moving to a cheaper suburb, a more modest type of property, or even consider buying in a cheaper city.
- Set up an emergency fund that can cover expenses for a few months while you are unemployed.
- Consider income protection insurance. This form of insurance provides temporary income if you are unable to work due to illness or injury.
Advice and support
Mortgage stress is more than financial in nature. It can affect your relationships and your mental and physical health.
Remember, there is always help with financial and emotional problems.