What exactly is mortgage stress, and how can you overcome it without losing your home?
With the Reserve Bank of Australia (RBA) signalling that interest rates are anticipated to rise in 2024, many banks and home loan providers have started to shift their own fixed rates.
Many of these changes have seen these financial institutions and providers’ fixed rates rise by around 20 to 40 basis points.
As a result, many Aussies have now been rushing to change their current plans with home loan providers or moving providers altogether.
With many still struggling with reduced cash flow as an extended consequence of lockdowns, people are more stressed than ever about their mortgages, especially if it’s pre-existing.
Defining mortgage stress
Mortgage stress is any financial stress associated with meeting your required mortgage repayments.
While many measure mortgage stress differently, a generalised version is when individuals spend 30 per cent or more of their household pre-tax on their monthly mortgage repayments.
If you’re unsure if you’re in mortgage stress, a quick way to assess your situation is to ask yourself:
- Am I finding it difficult to meet my mortgage repayments consistently?
- Do I think I might start missing my monthly repayments?
Keep in mind that not all homeowners who pay more than 30 per cent of their household income in monthly repayments will be under mortgage stress. Some will have lower general spend and can pay above 30 per cent without a problem. Some will purposely pay more to better their housing goals. Therefore, the 30 per cent rule is subject to individual financial circumstances and income.
Avoiding mortgage stress
If you find yourself suffering from mortgage stress, here are five ways you can try to avoid it:
1. Be realistic about what you can afford
Everyone wishes they could afford their dream home straight off the bat, but it’s not realistic for most Aussies.
Although it might be tempting to try your luck taking out a bigger loan, be critical with yourself about whether you can truly afford it.
At the end of the day, there is no point putting yourself at risk of mortgage stress by taking on excessive amounts of debt.
2. Consider rentvesting
Have you ever considered “rentvesting”? While it might sound like a made-up term, it’s a real-life option that many Aussies have taken up.
Imagine living in a perfect home for your lifestyle and owning a property that is perfect for your budget and hip pocket.
Rentvesting is where you buy and lease out an affordable investment property, then rent your ideal living property.
It’s a win-win situation, where the profit you make from your investment property funds both the rent in your dream home and existing loan repayments.
This strategy is particularly popular with younger new homeowners, especially as the prices of properties in inner-city areas continue to surge.
3. Set up an offset account
Depending on your home loan provider, if you have an offset account set up you can link the funds in the account to your home loan. The money in your account reduces the balance of your home loan, so you pay interest on a lower balance.
So the bonus of offset accounts is that they can also help reduce the interest paid on the loan.
Be aware that you will need to check the conditions of your loan with your home loan provider to organise an offset account.
More on this here: How to get the most from your offset account
4. Reduce unnecessary expenses
Have you been paying for a gym membership that you haven’t made use of for the last six months? How about those five streaming memberships that you’ve stopped using now that you can leave your home?
Unnecessary expenses like these can add up and impact your financial situation more than you think.
If you are struggling to meet your mortgage repayments, it’s probably a wise idea to assess where you can cut back your spending.
Cutting costs across different spending categories can add extra cash in your kitty to put towards your loan repayments.
Plenty of strategies: 101 frugal tips to help you live a richer life
5. Look into split loans
If you don’t want to change home loan providers, but are struggling to make your loan repayments, you could consider restructuring your loan.
It may be worth speaking to your home loan provider about splitting your loan. That way part of your home loan balance is charged at a variable rate and the other amount charged at a fixed rate.
This option provides you with more flexibility with payments, based on what works best for your financial situation.
If you are considering a restructure, it’s probably a good idea to speak to your home loan provider first. You can determine what fees apply to make loan changes and whether this is suitable for your situation.