What exactly is mortgage stress and what measures can be taken to prevent it?

Better Loan Solutions in Mornington Peninsula • Learning Centre • Insights

Do you know what mortgage stress is and how to steer clear of it? Our compilation of its definition, techniques to handle it, and top 10 tips for averting it will enlighten you.

What is mortgage stress?

Mortgage stress occurs when a household struggles with financial obligations and meeting their mortgage repayments. The interpretation of mortgage stress can differ, but it is primarily characterized by households spending over 30% of their pre-tax income on home loan payments.

When the amount spent by homeowners on their mortgage repayments and living expenses outweighs their earnings, Digital Finance Analytics has classified it as mortgage stress.

Usually, when a homeowner faces mortgage stress, it is often followed by mortgage arrears or default. This implies that the owner has failed to make a payment or a sequence of payments.

It's important to note that the 30% guideline isn't set in stone and may hold greater significance for households with lower income levels. Conversely, some wealthy households may willingly devote over 30% of their earnings towards paying off their loans. This usually occurs because they have enough money to manage their remaining expenses like healthcare and groceries.

According to a recent study conducted by Roy Morgan, more than one million people holding mortgages were susceptible to financial strain in the period between July to October 2022. This accounts for nearly a quarter (22.6%) of households in the same position. The research further demonstrated that by January 2023, over 1.1 million mortgage holders would likely face similar financial difficulties.

Ways to identify if you're experiencing mortgage stress

Experiencing a sense of discomfort in terms of your life and finances due to your mortgage could indicate that you are currently grappling with a situation known as mortgage stress.

If you want to determine whether you are susceptible to mortgage stress, you could evaluate whether your monthly mortgage payments surpass 30% of your total household earnings. Additionally, it's essential to take into account probable contingencies such as a drop in revenue or an increase in home loan interest rates.

Here are some other signs to look out for if you’re facing mortgage stress:

Your financial situation is such that you rely on your income to make ends meet
It becomes difficult for you to plan for unexpected financial obligations, like car repairs or medical bills.
Your budget constraints have also led to a situation where you can no longer indulge in luxuries such as dining out or ordering takeaway, or even entertainment.

You may want to consider posing these questions to yourself:

Do you find yourself dipping into your savings to cover your day-to-day expenses?
Are your loan repayments eating up more than 30% of your pre-tax income?
Do you rely on the kindness of family or friends to help pay your bills?
Have you missed multiple home loan payments?
Have you stopped enjoying any leisure activities because you're struggling to make ends meet?
Are your financial worries taking a toll on your own well-being and personal relationships?

Tips for managing mortgage payments and alleviating financial strain

1. Adopt a practical approach

Ensure you choose a home within your financial means to avoid any potential difficulty in repaying your loan. The utilization of a loan repayment calculator can assist in comprehending the maximum amount you can borrow based on your budget.

2. Assess the wellbeing of your mortgage

When was the last time you had your home loan reviewed? Conducting a periodic evaluation of your mortgage will enable you to determine if it is still suitable for your requirements while checking if your creditor still provides an advantageous interest rate in the current market.

Experience the convenience of our online-only lending approach that brings you fantastic deals with ease. Choose from a diverse selection of fast and flexible loans that cater to your unique needs. With award-winning rates, you can compare and find your perfect match easily. No matter where your journey takes you, our team is dedicated to offering genuine care every step of the way. Enjoy an unparalleled experience with us.

3. Reconsider your financial plan

As you move forward with your loan, it's likely that your financial situation will evolve. Your budget will constantly fluctuate and you may find yourself needing to allocate additional funds to healthcare, learning, or perhaps a much-needed vacation.

Accordingly, it's important to periodically reassess your budget whenever there is a change to your circumstances. Additionally, make sure to provide some extra space or a safety net in case of unexpected circumstances. Perhaps it's about time for you to establish a budget if you haven't already done so.

Consider if there are any areas where you can cut back to reduce your expenses.

4. Understand your boundaries

A mortgage is a substantial obligation. It can be very tempting to acquire additional debt in order to purchase the latest must-have gadget or fashionable handbag. However, doing so can quickly disrupt your financial plans. Before making any purchases, it's important to consider your options, understand your borrowing capabilities, and adhere to your budget at all times.

5. Offset sub-accounts can be utilized for financial purposes

A great way to minimize the burden of your mortgage is to utilize an offset sub-account. By doing so, you can balance the value of your home loan with the sum present in your offset sub-account. Not only does this streamline the process of managing your home loan, but it also allows you to save a substantial amount of money in the form of interest payable.

When you're charged lower interest on your loan, a greater portion of your monthly repayments can be allocated towards paying off the principal amount of your debt. This can lead to a reduction in the loan tenure and, therefore, significantly reduce your expenses.

Suppose you possessed a loan amounting to $500,000, while having $50,000 in your offset sub-account. In that case, interest would be levied only on $450,000 of the loan.

Our services provide an offset sub-account with unrestricted withdrawals, no expenses, and no constraints on the withdrawal amount while retaining complete redraw options. Utilizing an offset sub-account can mitigate the likelihood of encountering financial burdens related to mortgage payments.

6. Splitting a loan is worth considering

By opting for a split loan, you can enjoy the benefits of variable and fixed rates simultaneously. Essentially, this means that a portion of your mortgage balance will accrue interest on a variable rate, while another portion will accrue interest on a fixed rate. Depending on your lender, you have the liberty to divide your balance as per your preference. You may choose to split it in a 60:40 ratio, where 60% will be subject to variable interest rates, while the remaining 40% will have a fixed interest rate for a specific duration. Alternatively, you can opt for an even split of 50:50.

If we take the situation into consideration, a split loan with a 60:40 ratio would imply that $300,000 incurs a variable interest rate, and the remaining $200,000 incurs a fixed interest rate, assuming a loan of $500,000.

When opting for split loans, you can reap the advantages of both rate types, which are usually mutually exclusive if you only choose one. This entails having the opportunity to have an offset sub-account and make additional repayments based on your variable rate. Meanwhile, your fixed rate can provide you with reliable cash flow regarding your monthly payments.

Having a fixed-rate loan ensures that your monthly payments will remain constant irrespective of any interest rate hikes, and if the interest rate falls, you can make the most of your variable rate.

7. Purchasing based on your financial capability

Due to the intense competitiveness in most areas, low levels of inventory in the market, and a pervasive sense of FOMO among those seeking to purchase their first homes, numerous individuals are hurrying to financial institutions to obtain maximum loan amounts.

Many households face mortgage stress, which is a regrettable situation. Borrowers should steer clear of taking out as much money as possible and rather opt for a sum that they will be capable of repaying each month.

It is essential for buyers to approach purchases logically rather than emotionally. Engaging in a bidding war and exceeding one's budget due to emotional attachment is a guaranteed recipe for financial hardship.

8. Reduce monetary obligations by decreasing overall spending

Reducing expenses is more easily stated than carried out, however, any optional acquisitions that households can decrease or eliminate will alleviate their mortgage pressure. Households can potentially eliminate things like streaming services, gym memberships that are not being utilized, and buying new clothes.

It's advisable to explore multiple options while searching for better deals on essential services like electricity, water, gas, phone, and internet. Several providers tend to charge customers an additional loyalty tax, whereas new ones offer attractive incentives to build a customer base.

One alternative method to alleviate mortgage stress is by minimizing debts. It is possible to lessen the urge to overspend by reducing or eliminating credit card and buy-now, pay-later service accounts.

9. An emergency fund for unexpected expenses

When unforeseen circumstances arise, an emergency fund can be a source of relief and support to help you regain financial stability. The importance of such a fund cannot be overstated.

10. Speak to a mortgage broker

It's important to review your loan regularly to ensure it still meets your needs. Working with a mortgage broker can help make the process easier and help you find the best products for your needs. Remember, you're not locked into your existing lender, and you can move to another one if it makes more financial sense. For a deep dive into your loans and to find the best deal for your situation, please reach out to our mortgage broker team on 03 5911 7000.

We can help.

It's important to review your home loan regularly to ensure it still meets your needs.
Working with a mortgage broker can help make the process easier.

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