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What is mortgage stress and what can you do?

By Emma Smith
As the cost of living in Australia continues to rise, more people are finding themselves suffering from mortgage stress. But what does that actually mean?

Mortgage stress has been a hot topic of late, with a January 2019 report by Digital Finance Analytics finding that 31% of owner-occupied households suffered from it.

And so we spoke to head of lending operations at Bank First, John Spiteri, to find out what mortgage stress means and how we can avoid it.

Mortgage stress, or housing stress, can be caused when a person’s income is disproportionate to their loan amount. Picture: Getty

What is mortgage stress?

Mortgage stress is the feeling people experience when their monthly repayments are so high that they struggle to pay the bills. While there’s no official threshold, the consensus is that people begin to suffer from mortgage stress when their mortgage repayments exceed 30% of their household income.

“[It’s] when people get into financial pressure, generally because they either take on a higher commitment than they should have, or the forces of nature move against them and interest rates go up, or someone loses a job or falls ill,” says Spiteri.

How does it happen?

Generally, mortgage stress happens when a borrower stretches their financial muscles and the pressure of an unexpected monetary setback causes them to snap.

For example, a borrower might increase their spending and become accustomed to a certain lifestyle, only to realise later that they can’t keep up. Or their income may take a hit, pushing their monthly repayments over the 30% mortgage stress threshold.

“Sometimes people think they’ll be alright, [that] they just need to cut back on a bit of this or a bit of that. But what they find after a while is that they get a bit complacent in their lifestyle, or they find that they’ve had to cut back on things they enjoyed before, creating a kind of frustration or stress,” he said.

‘Australians also haven’t had a pay rise for a few years now but the cost of living has continued to increase. People are also starting to talk about interest rates going up again sometime in the future, which is probably going to cause a problem as well if they’re already finding things a bit difficult.”

A budgeting tool can help you keep track of your outgoing spending. Picture: Getty

Take our mortgage stress test

As we mentioned earlier, there’s no official definition for mortgage stress. But if you answer yes to the majority of these questions, that’s a fairly good indication that you’re suffering under the weight of it.

  • Are you struggling to pay your utility bills?
  • Does more than 30% of your pre-tax salary go towards your home loan?
  • Are you expecting a baby and worried about how you will cover the costs of raising a child? Or are you planning to get married and equally worried about how you will fund the wedding?
  • Are you worried about how you will pay for your new car or other large purchases?
  • Are you struggling to pay off your credit card?

How can I avoid mortgage stress?

The best way to avoid mortgage stress is to buy a home that’s well within your budget, so that you can build up enough savings to see you through an unexpected financial emergency.

Responsible lending guidelines mean that banks should help you do this, but Spiteri says you need to do your part, too, by providing an honest and detailed appraisal of your living expenses.

“People often think they spend a certain amount per month, but really they spend that amount plus 50 per cent,” he says.

“If you underestimate your expenses when telling the bank what you spend on living at the moment, and they calculate how much you can borrow based on that amount, then you’re putting yourself on the back foot from day one.”

1. Use a budget tool

Given many of us estimate our expenses to be less than they actually are, it’s advisable to track all your expenses in a spreadsheet or budget tool, so that you can build a clearer picture of your financial situation.

The better you understand your finances, the easier it will be to service your monthly repayments.

2. Save regularly

Set up automatic deposits into your savings account and treat them like an unavoidable expense.

Building up a large reserve of savings will provide you with the wriggle room required to negotiate a sudden illness or unexpected loss in income without defaulting on your mortgage.

Buying a house you can afford is the best way to avoid mortgage stress. Picture:

3. Make additional repayments when you can

Whenever you’re in a good position financially, consider making extra repayments, as this will reduce your principal and, in turn, reduce your future interest repayments.

It’s worth noting, too, that, if you have a variable-rate loan, most lenders will allow you to access these additional repayments should you run into trouble down the track, via what is known as a ‘redraw facility’.

If I’m suffering mortgage stress now, what should I do?

Battling to keep your home is a horrible feeling. And while you may at times feel like there’s no way out, there are a number of ways you can alleviate the pressure.

1. Talk to your lender

The first step is to have a frank conversation with your mortgage provider or financial advisor.

“One option might be consolidating your loans, but it could be that [your mortgage stress] is temporary, in which case you wouldn’t consolidate, but you might see if you could speak to a financial planner to help with your budget,” said Spiteri.

Depending on your situation, some lenders might even reconfigure your repayments or allow you a repayment holiday for a short period.

Top tip: Credit cards are not the best friend of those in mortgage stress. Picture: Getty

2. Consider using an offset account

Using an offset account is an easy way to reduce the amount of interest you pay on your home loan.

They tend to offer savings on your interest payments that exceed the interest you would earn on a regular savings account, and, as interest is calculated on a daily basis, every day you have money in the account, you reduce the amount you pay on your loan.

However, you should carefully weigh up this benefit against the added costs of operating such an account; many charge higher interest rates, as well as additional fees for monthly account keeping and withdrawals.

3. Temporarily switch to an interest-only loan

If a temporary change in circumstances means you’re struggling to meet your monthly repayments, discuss with your lender the possibility of switching to an interest-only loan.

This will alleviate the stress by reducing your monthly repayments. However, it’s not recommended as a long-term strategy, as it will result in you paying the bank a lot more money over the duration of the loan.

4. Cut out unnecessary expenditure

It’s difficult to make spending cuts once you’ve become accustomed to a certain standard of living, but missing a mortgage repayment is a much worse fate than downgrading a few aspects of your lifestyle.

You may be able to recover from the one or two late-payment fees, but the interest will increase a fair bit during the period you don’t pay, meaning you’ll be lumped with the loan for longer, and pay more for your home than you initially planned.

Cut out takeaways, bring packed lunches to work, spend less on clothes, and temporarily switch to a cheaper gym membership.

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