Struggling with mortgage stress is a position no one wants to find themselves in. Financial difficulty where the consequence of failure is losing your home is an emotional burden which can control your life. Luckily, situations like this can be avoided with careful consideration and planning.
When choosing a home and borrowing money, many people make the mistake of borrowing the maximum the bank says they can afford.
Often long term considerations regarding the on-going financial commitment are not properly considered and lifestyle changes down the track or unexpected expenses can completely change your financial position.
The common definition of “mortgage stress” is where you spend more than 30% of your pre-tax income on your home loan repayments.
According to data from the Australian Bureau of Statistics, using this criteria, approximately 3 in every 10 mortgages meet this definition.
Many home-owners have encountered mortgage stress, regardless of whether they are first home buyers, next home buyers or experienced investors.
Mortgage stress typically occurs when people start to pay more than 30% of their pre-tax income on their loan repayments. It may also be described as the terrible feeling when you don’t know how you will pay your next bill, or when an individual’s household income doesn’t cover all of the outgoings.
It is always best practice to have some extra money in your budget for times of greater financial need so that you are able to avoid over committing financially.
Planning for the future and unexpected changes is crucial before you take out a home loan.
Deep Dive: While this topic offers a broad understanding, you might want to delve deeper into the specifics of what is mortgage stress. It’s a perfect read to accompany and enhance the insights you’re currently exploring.
The tips below will help you to start planning for your financial future and avoid mortgage stress:
Buy the house you can actually afford
The biggest way to reduce or prevent mortgage stress is to purchase a house that you can actually afford, rather than using the maximum fund available to you. The mortgage calculator on our home loans page may be a helpful guide in getting a very base figure to start your planning.
A mortgage broker is also helpful at this stage in determining a realistic borrowing capacity. That way, you’ll still have enough cash to service your monthly repayments if you lose your job, your partner falls ill, or interest rates suddenly spike.
Be honest and rely on a budget tool
Yes, honesty can be a very good policy when you look forward to getting a mortgaged property, and relying on the services of a good budget tool can save you from a lot of unwanted financial mess.
Unless you are in the practise of closely tracking your spending, this may be a process which is time consuming and difficult to predict accurately. The best way to start is to categorise all your spending from the previous quarter and use percentages to determine where the majority of your money is being spent.
Remember that different times of year have different expenses that you will need to keep in mind (air-conditioning in summer), and that some major payments only happen once a year (car registration or insurance).
In a separate sheet, create a comparative budget which accounts for potential mortgage repayments, savings, and 10-20% for emergencies.
Compare the spreadsheets and see if the mortgage repayments are realistic and where you can cut-back on your spending.
Remember that mortgage repayments can be affected by interest rate changes and you will need to be able to afford any increase in the future.
Discuss with your mortgage broker or bank
If you are in a position of difficulty, its never a bad idea to ask your lender or mortgage broker what your options are. Often there are arrangements you can make to reduce your repayments for a short period of time in times of difficulty.
If your work or income has been affected by COVID-19 then there may be particular allowances or concessions, you may take advantage of. It never hurts to ask
Offset accounts
Creating offset accounts could be another way of diminishing the stress caused by unaffordable or simply unwisely curated mortgages. These financial tools are fashioned to reduce the monthly repayments by offsetting the account balances of the stuck individuals against the balance of the actual home loan, so the interest is paid on a smaller proportion.
However, home loans that offer an offset account facility often charge higher interest rates and come with hidden fees, so it’s important to read the small print before signing a contract.
Additional Payments Might Save the Day!
If you want to be prepared for the future and alleviate any future stress, making extra payments may allow you some additional financial stability. In the end, the less money you owe on a loan, the better off you will be.
Getting into difficulty
If you do get into difficulty, its best to speak with your lender as soon as possible rather than waiting until things get out of hand.
Financial hardship programs may be available for short-term difficulties and if the problem seems to be one which is unlikely to be resolved quickly, the bank may recommend a financial counsellor. Its in the best interest of the lender to help you so that you are able to continue to make your payments so they are usually helpful in trying to find a solution.
With careful planning and following the above tips, you should be able to avoid situations of mortgage stress, but remember its always better to acknowledge a problem and act quickly than let yourself get into a more difficult position where the risk is losing your home.
If you’re looking for home loans, you can consider taking a look at Soho Home Loans. It’s as simple as filling in some basic information and our dedicated mortgage broker will reach out to you at your convenience.
