What is mortgage stress and how do you know if you are in it?

If you’re feeling scared or embarrassed that you’re having trouble servicing your home loan, you’re not alone. Recent figures from Digital Finance Analytics showed a total of 1.52 million households in Australia were in mortgage stress at the start of May. That’s around 38% of households experiencing mortgage stress.

Mortgage stress is not necessarily a bad thing though. It’s just a measurement that can help indicate to borrowers if they are paying too high a portion of their income into their mortgage and if you are then there are always options.

What is mortgage stress?

Mortgage stress is commonly defined as paying more than 30% of a household’s pre-tax income towards monthly mortgage repayments.

Basically, aiming to keep your mortgage repayments at or below 30% of your pre-tax income is a worthwhile measurement to keep in mind for any homeowner (and for renters as well). Mortgage stress can leave you in a vulnerable position if your financial situation changes, such as if your mortgage repayments increase, your household expenses increase, or your household income decreases.

How to avoid mortgage stress

1. Be realistic

Be realistic about what you can afford when choosing a home to make sure you can easily repay your home loan. A loan repayment calculator is a useful tool to help understand how much you can afford to borrow given your budget.

2. Give your mortgage a health check

Have you had a home loan health check recently? Assessing your home loan every couple of years will give you an idea of whether or not, your mortgage is still right for you and your needs and whether your lender still offers a competitive rate in the market.

3. Do your budget again

Your financial situation will likely change over the life of your loan. Your budget will differ from time to time. So be sure to redo your budget whenever your circumstances change. Also, don’t forget to add a buffer or ‘breathing room’ in case of emergency.

4. Know your limit

A mortgage is a huge debt. You may be tempted to take out further debt so you can buy a new must-have gadget or a designer bag. If so, this can quickly take you off budget. Think first of your purchases, know your limits as a borrower, and as much as possible stick with your budget.

5.  Use an offset sub-account

Reduce your mortgage stress by having an offset sub-account. This lets you offset the balance of your home loan with the amount you have in your offset sub-account. It’s a hassle-free way of paying for your home loan that also lets you save money in interest payable.

This means you’ll be charged less interest on the loan, so more of your monthly repayments will be paying off your principal (your debt). This can reduce the length of your loan and potentially save you thousands.

For example, if you had a $500,000 loan balance and $50,000 in your offset account, you’d only be charged interest on $450,000 of the loan.

We offer 100% redraw offsets with unlimited withdrawals, no fees, and no minimum or maximum withdrawal amount. An offset can help you reduce the chance of you experiencing mortgage stress.

6. Consider a split loan

A split loan refers to having one portion of your home loan balance charged at a variable rate and another charged at a fixed rate, giving you access to the advantages of both. You can split your balance how you wish, depending on your lender, be it 60:40 where 60% is charged at a variable rate and 40% is charged at a fixed rate for a period of time, or 50:50. Using the former as an example, if you had a $500,000 loan, a 60:40 split loan would mean $300,000 is charged at a variable rate, and $200,000 is charged at a fixed rate.

Split loans allow you to take advantage of the benefits of both types of rates, some of which would often be exclusive if you only went with one. A split loan means you could have an offset sub-account and make extra repayments due to your variable rate, while your fixed-rate could give you some cash-flow certainty with regards to your monthly repayments.

A fixed-rate means your monthly repayments won’t go up if interest rates do, while if interest rates fall, you’ll be able to take advantage via your variable rate.

7. Buy within your means

House prices in Australia have skyrocketed in recent times and most economists and property experts agree there is no end in sight to the growth. With the high degree of competitiveness in most locations, below-average levels of stock in the market, and a general feeling of fear of missing out (FOMO) among first-home buyers, many people are rushing to lenders to borrow as much money as they can.

Unfortunately, this is how many households find themselves in mortgage stress. Buyers shouldn’t borrow as much money as they can but rather borrow as much as they can that they will be able to afford the monthly repayments.

Furthermore, buyers need to buy with their heads and not their hearts. Getting into a bidding war and buying above your price range because you’re emotionally attached is a sure-fire way to get into mortgage stress.

8. Cut down your expenses and debts

Cutting down expenses is easier said than done, but whatever discretionary purchases households can reduce or cut down will reduce mortgage stress. For example, things like streaming services, unused gym memberships, and clothes shopping are all purchases households may be able to cut out.

Consider shopping around for better deals on electricity, water, gas, phone, and internet, as many providers will charge a loyalty tax, while a new provider will provide an incentive to get you to be their customer.

Cutting down debts can be another way to reduce mortgage stress. Reducing and canceling credit cards can reduce the temptation to overspend. The same rule applies for buy-now, pay-later services.