What is mortgage stress and how to prevent it in Australia?
It’s not uncommon to feel a measure of finance-related stress in Australia from time to time. When you’re planning a costly event (such as a wedding), when you’ve just come back from a big holiday, when you’re working a little less than usual… these are all situations where you may feel some added pressure to meet your monthly home loan repayments.
But these are all temporary scenarios. So, is long-term mortgage stress a real thing? And if so, how can you prevent it from happening?
What is mortgage stress?
The mortgage stress definition:
In Australia, mortgage stress is often described as a situation where a household is consistently struggling to pay their minimum monthly expenses. Currently, there are 1.1 million mortgage holders or roughly a quarter of households with mortgages that are under mortgage stress, according to a study from Roy Morgan.
It is expected that more Australian homeowners will be at risk of being in mortgage stress with more than 800,000 households falling off fixed rates on to pricier variable rates before 2023 ends.
What percentage of salary should go to mortgage Australia?
The threshold for triggering loan stress is obviously going to vary depending on a person’s financial situation, but traditionally the figure is set at 30%.
This means that if 30% (or more) of your monthly income is used to pay your minimum monthly mortgage repayments, then you are in danger of mortgage stress.
Why is this the case? Because interest rates can fluctuate with time. While you may be in a position to commit 30% of your income towards your mortgage at the moment, will this still be the case if interest rates rise in the future?
Read: What to do when your fixed rate mortgage ends
What causes mortgage stress?
Mortgage stress can happen for a variety of reasons in Australia.
Perhaps the biggest culprit is the rapid interest rate rise. Interest rates are rising exponentially due to the RBA’s recent decisions to raise the cash rate to curb the nation’s high inflation rate.
This has resulted in a huge jump up in Australian property prices as well as mortgages becoming more expensive to service. A borrower with a $500,000 home loan is likely paying $908 extra on their monthly repayments!
At the time of this writing (July 2023) the RBA cash rate sits at 4.10%.
Other factors that cause mortgage stress are unexpected expenses coming up, or other financial setbacks, income loss and unemployment, borrowers living beyond their means, and lack of wage growth across many industries.
Mortgage stress can have significant financial and emotional consequences for homeowners, including defaulting on mortgage payments, foreclosure, and the loss of their homes.
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How do I know if I’m under mortgage stress?
Although mortgage stress is typically defined by a specific percentage of one’s income being spent on mortgage payments, there are also some indicators that may suggest you’re experiencing mortgage stress that are not based on numerical calculations.
These signs could include being unable to afford luxuries, such as dining out, going to the cinema or ordering take away, as well as having to withdraw from social activities that require payment.
Another telltale sign of mortgage stress is when you are living paycheck to paycheck and struggling to budget for unexpected expenses, such as medical bills or car services. In such situations, you may need to rely on the support of friends and family, use credit cards, or take out personal loans from the bank to make ends meet.
How can I avoid mortgage stress in Australia?
The stress of buying a house has no doubt doubled or even tripled for most mortgage holders. But don’t be too discouraged — there are ways to mitigate mortgage stress.
1. Adhere to the 28% rule
A good way to prevent mortgage stress in Australia is to adhere to the 28% rule, whereby your mortgage repayments never exceed 28% of your monthly income.
Bear in mind that this refers only to your minimum monthly repayment, not the total amount that you choose to pay. If interest rates are low and your other expenses are negligible, then it may be worth making additional payments on your mortgage to lower the principal interest-earning portion of the debt and pay off your home loan sooner.
But the key is to find a comfortable balance. Ensuring that the minimum monthly repayment is no more than 28% will help you to remain at a lower risk of incurring loan stress should interest rates increase in the future.
2. Assess yourself via a mortgage stress test
When deciding how much you can afford to borrow it is important to consider your financial situation as a whole. For example, do you have student debt? Personal loans? If interest rates were to rise would you still be able to meet your minimum monthly mortgage repayments while simultaneously servicing other debt?
There is a tool called a mortgage stress test to help you know if you are under mortgage stress. It is a financial assessment that banks and lenders use to determine whether a borrower can manage their mortgage payments, both now and in the future.
It involves analysing a borrower’s income, expenses, and other financial commitments to assess their ability to make mortgage payments under different scenarios, including potential interest rate increases.
When does mortgage stress test start? It is typically conducted during the loan application process to ensure that borrowers can afford their mortgage repayments, and it also takes into account the borrower’s capacity to handle any unexpected financial shocks that may occur, such as job loss or a reduction in income.
3. Refinance your home loan
If you currently have high levels of personal debt, then it could be worth refinancing your mortgage to take advantage of possible lower interest rates to consolidate your debts into one serviceable repayment. Some of your debts outside of the mortgage may be at higher rates, and/or your current home loan lender is not competitive.
A lower interest rate, which can reduce your monthly mortgage payments which lets you free up some of your income and ease financial pressure, helping you avoid mortgage stress. And also to consider is extending your loan term back out to 25 or 30 years if that suits your situation as this can make a big difference to reducing loan payments.
In addition, refinancing to consolidate your debts can simplify your finances and reduce your overall debt payments. Consolidating debt through refinancing can also potentially lower your interest rates, especially if you have high-interest debts, such as credit cards, and can qualify for a lower interest rate on a consolidated loan. This can save you money on interest charges over time and reduce your overall debt burden.
4. Cut back your retail spending
To cut back on retail spending, you may need to create a budget and track your expenses carefully to identify areas where you can cut back. This could include reducing unnecessary purchases, such as impulse buys or luxury items, and finding ways to save money on essential expenses, such as groceries and utilities.
When you reduce your retail spending, not only are you able to save money that can be put towards your mortgage payments. You can also potentially develop better financial habits and improve your overall financial situation.
What else can I do to eliminate financial stress? Work with the brokers at North Brisbane Home Loans
Ultimately, the best way to eliminate mortgage stress is to consult with a skilled mortgage broker. The award-winning team of NBHL North Brisbane mortgage brokers have over 90 years’ combined experience in the financial industry, so you can have confidence that they’ll find you the right mortgage with minimal stress.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
