What Is Mortgage Stress and How to Avoid It?

5-MINUTE READ
Share:

Are you worried about being one of the 15.8% Australians experiencing mortgage stress? With record-high property prices and an economy recovering from the pandemic, it’s no wonder many Australians are struggling with mortgage stress.

As an Aussie expat, managing a home loan from abroad could put you at increased risk of mortgage stress. Dealing with different currencies and navigating overseas lending criteria adds to housing stress.

However, it’s not an inevitable part of buying a house; you can take steps to avoid mortgage stress. And, if you suspect you might already feel the effects of mortgage stress, we can help you manage the situation. Read on to learn how you can beat mortgage stress once and for all.

What Is Mortgage Stress?

Mortgage stress is when a homeowner struggles to pay bills and home loan repayments. Everyone might experience mortgage stress differently; for some, it might be an increase in mortgage repayments. Generally speaking, mortgage stress is an uncomfortable income to loan repayments ratio.

While there are few exact definitions of mortgage stress, it’s generally understood as relatively low income spending more than 30% of its pre-tax income on mortgage repayments.

On the other hand, Roy Morgan measures mortgage stress with a complex formula, including household income, costs, and home loan repayments. Digital Finance Analytics calculates mortgage stress as homeowners spend more on repayments and other expenses than they earn.

Regardless of whether you meet specific criteria, if you struggle to meet your mortgage repayments and it affects your mental and physical health, you could be experiencing mortgage stress.

What Is Mortgage Stress and How to Avoid It?

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

How Do You Know If You Are in Mortgage Stress?

Most homeowners will begin to feel mortgage stress before defaulting on their monthly repayments, going into arrears.

The easiest way to work out if you’re in mortgage stress is to calculate whether your home loan repayments are more than 30% of your entire household finances. You might also want to determine what would happen if your income reduced or your home loan interest rate increased.

The 30% rule is not universal. It doesn’t consider the benefits of extra repayments in the long term or work for all income levels. For example, someone with an annual income of $500,000 can better manage high mortgage payments than someone on $30,000 a year.

A high-income household might choose to spend more than 30% of their income. They will still have more than enough money to pay for other essentials, like food, health, and education.

Why Is Mortgage Stress a Problem?

No homeowner wants to experience mortgage stress. It creates pressure to meet your monthly repayment obligations, which might affect your personal life. Your physical and mental health and personal relationships might suffer. You might not be able to make decisions as effectively.

When a home loan borrower is under mortgage stress, they’re more likely to make irrational decisions. For instance, they might take out a high-interest personal loan or make rushed investments. Therefore, it can further affect other aspects of your financial situation and damage your relationship with your household.

As a result, you must take steps to avoid mortgage stress.

What Causes Mortgage Stress?

While the definition states that spending more than 30% of your income on home loans and interest repayments puts you at risk of mortgage stress, other factors can trigger stress too. Usually, it is out of the borrower’s control, such as job loss or rising interest rates.

Even if you’re only spending 20% of your income on your home loan, other expenses could put you under financial stress. For example, a total household income of $60,000 with three children and rising energy costs will be more stressful than someone earning the same amount with no dependents.

Other causes of mortgage stress:

  • Circumstances of your job
  • Relationships with family
  • Living arrangements
  • Other essential expenses
  • Taking out large loans to cope with the sky-high property prices in Australia
  • Unexpected expenses, such as a medical bill
  • The economy

The last few years have hit a lot of households hard financially, further contributing to mortgage stress. If you think you have taken out a home loan that you cannot manage, or your circumstances have changed, speak to a mortgage broker about refinancing to a better loan for your situation.

What Is Mortgage Stress and How to Avoid It

How Can I Manage Mortgage Stress?

If you think you’re experiencing mortgage stress or that you might be at risk, there are several steps you can take to make it more manageable. Firstly, you will need to sit down with your financial records and organise yourself. Here are some steps you can take to manage mortgage stress:

  • Look through your monthly spending. Are there any unnecessary expenses you can cut out? For example, if you eat out once a week or subscribe to a gym membership you rarely use, can you reduce these expenses? You don’t have to be too strict with your spending, but cutting a few costs here and there will make a difference.
  • Once you have analysed your monthly spending, create a budget. Make sure you stick to it.
  • Can you increase your income? It might seem obvious, but increasing your sources of income will reduce mortgage stress. You could find weekend work for Uber or Deliveroo. You could rent out a spare room in your house. Or, you could sell items you no longer need online. Is it worth asking your current boss for a raise? Even the slightest extra will allow a little more financial flexibility.
  • Consider downgrading your car or selling valuable items you no longer need. Refinancing your car loan might help you pay your home loan repayments. Speak to a mortgage broker about your credit provider options.
  • Switch your mortgage to interest-only repayments, lowering your repayments in the short term. Although, seek professional advice before refinancing as it could cost more in the long term when the mortgage reverts to a principal and interest loan. However, it offers financial relief in the short term.
  • Refinance your mortgage to one with a lower interest rate. Even reducing your interest repayment by 0.5% could save you a couple of hundred dollars a month and significantly reduce the overall cost of your home loan.
  • Downsize your home by selling and buying a cheaper property. The process might be stressful in itself and will cost you time and money. Accordingly, you should factor in the additional costs before committing to selling your home.

You must keep making repayments on your home loan. It might be challenging, but future lenders will be less likely to offer you credit if you default on your first loan. If you’re struggling, speak to a financial advisor about your situation.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Hardship Assistance and Repayment Holidays

Before selling your home or taking dramatic steps, contact your lender. Many lenders offer solutions for struggling borrowers.

Ask your lender for a repayment holiday. All lenders have hardship teams ready to help struggling borrowers. Your lender might change the terms of your loan or offer hardship variation in the form of a repayment holiday.

What Is Mortgage Stress and How to Avoid It

How Can I Avoid Mortgage Stress Before It Happens?

Most of us would prefer never to risk mortgage stress. While there are ways to manage stress, it’s best to prevent it from happening at all. We have a few steps you can take to avoid mortgage stress.

However, it can happen to anyone – reducing the risk of mortgage stress doesn’t mean that your circumstances won’t change in the future. Therefore, it’s best to stick to your budget throughout your home loan’s lifetime.

Get a Suitable Home Loan

When you first apply for your home loan, consider your financial situation honestly. If you persuade yourself and your mortgage broker that you have fewer expenses than you actually do, you could find yourself saddled with mortgage repayments you cannot realistically afford.

Calculate your borrowing power, but don’t borrow the maximum amount. It’s a good idea to borrow slightly less than the bank is willing to lend you to allow for a level of flexibility.

Buy a House You Can Afford

Remember that just because you cannot buy your dream property now, it doesn’t mean you can’t refinance in the future and sell your property to get the one you want. Property prices in some parts of Australia are nearing $2 million – a cost that is above many expat budgets. However, other areas of the country – such as Perth, Hobart, or Darwin – are far more affordable.

Be Honest About Your Spending Habits

When you first consult a mortgage broker, it’s tempting to tell yourself that you can cut out a few expenses here and there. Fiddling the numbers on the borrowing power calculator is easier than actually cutting out the costs. While you might be able to manage a stricter budget while repaying your home loan, you should still be realistic.

If you decide to reduce how often you eat out, that’s fine. However, if you know that you won’t stick to the plan, be honest with yourself and your mortgage broker.

Get an Offset Account

Offset accounts are excellent ways to reduce the financial burden of a home loan. Essentially, an offset account is a standard transaction account where you can deposit and withdraw money. Any sum kept in your offset account reduces the interest you pay on your home loan.

For example, if you keep $50,000 in your offset account, your principal home loan amount charged interest would reduce by $50,000. Throughout your home loan, offset arrangements can save you thousands of dollars and reduce the length of your loan. Yet, you can withdraw the money without consequence in times of financial stress.

What Is Mortgage Stress and How to Avoid It?

Refinance to a Lower Rate

If you already have a home loan and worry that one day you might experience mortgage stress, consider refinancing to lower interest rates. Once you have made regular payments towards your home loan, you will boost your credit score and borrowing power. Therefore, the lender might offer a lower interest rate than they did when you first took out the loan.

Consider whether a fixed rate home loan or interest-only repayments will suit your personal circumstances.

Speak to a mortgage broker about your refinancing options. You can also negotiate extra features, such as an offset account or redraw facility that will ease the burden of your home loan.

Rent Out Rooms

Renting a room in your property is a way to manage mortgage stress and prevent it from happening altogether. If you live abroad and own a property in Australia, renting it out could provide an extra source of income. If you already rent your property, consider how you might improve its value to raise your weekly asking rent.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Debt Consolidation

Consider consolidating your debts if you have several other small outstanding debts, such as a credit card or personal loan. Bringing all your obligations under one loan and one repayment can free up cash to spend on your home loan.

However, it’s not the best move for everyone. Debt consolidation might end up more expensive overall. Seek personal advice if you’re considering debt consolidation.

See A Financial Adviser

Only 1.8 million Aussies use professional financial advice – just under 7% of the population. Generally speaking, those in dire need of financial help cannot afford to consult a financial adviser. Therefore, you must talk to a professional before the situation becomes urgent.

When you first take out a home loan for your Australian property, consult a financial adviser about your circumstances. They can help you make the most of your income and grow your wealth in the future. With a financial adviser at your side, you can identify areas that might cause mortgage stress.

What Is Mortgage Stress and How to Avoid It

In Summary,

Many Australians are facing mortgage stress. With the world returning to normal, many financial relief schemes and repayment holidays are winding down. However, living costs and property prices continue to rise, meaning more and more Aussies are at risk of mortgage stress. You can take steps to prevent stress and manage your financial situation.

The best way to avoid mortgage stress is to take out a suitable loan in the first place. Speak to a mortgage broker to secure the right home loan for your financial situation to ensure you can comfortably repay your mortgage each month.

Frequently Asked Questions

What Does Mortgage Stress Mean?

Mortgage stress is commonly defined as mortgage holders spending more than 30% of their household income on home loan repayments. However, this isn’t a blanket rule – other factors, such as the number of dependents in your house, also play a part. Typically, a change in financial circumstances (such as losing your job) causes mortgage stress.

How Is Mortgage Stress Calculated?

To calculate whether you have mortgage stress, add up your entire household income. Determine whether your home loan repayments are 30% or more of your total income. You might also be facing mortgage stress if your other expenses mean you cannot meet your home loan commitments.

Is Having a Mortgage Stressful?

A mortgage doesn’t have to be stressful. If you take out a suitable home loan that comfortably fits in your budget, you can enjoy the benefits of buying a new property without compromising your household finances.

How Much Money Do You Have to Earn to Avoid Mortgage Stress?

Your mortgage repayments should be more than 30% of your household income. If you pay $12,000 towards your home loan annually, you need to earn at least $36,000 a year. Although, if you have other expensive financial commitments, you may still struggle to make your mortgage repayments.

What Percentage of Your Salary Should Go to Your Mortgage In Australia?

Ideally, you should spend less than 30% of your annual income on mortgage repayments. If you pay more towards your home loan, you may struggle to pay other expenses and face mortgage stress. If you cannot manage your mortgage stress, you may default on your payments, affecting your future creditworthiness.

Who Does Mortgage Stress Affect?

Mortgage stress affects the home loan borrower, their household, and their friends and family. It can severely impact your mental health and physical well-being and those around you. Take the necessary steps to ensure your home loan repayments are manageable to avoid mortgage stress.

Odin Mortgage Logo

See What You Qualify For

Australian Mortgages for Expats & Overseas Residents