What Is Mortgage Stress And How To Avoid It? - loans.com.au (2024)

A mortgage is typically the biggest monthly expense a household can have. If you get into financial trouble or rack up too much debt, you may experience mortgage stress. Even the rising cost of living, such as high fuel prices and expensive groceries could create a challenge for household budgets.

So what even is mortgage stress and how can you avoid it? We’ve put together what mortgage stress means, how to manage it, and the 10 best ways to avoid it in the first place.

What is mortgage stress?

Mortgage stress is when a household finds it difficult to pay their bills and also over their home loan repayments. While there are varied definitions of what mortgage stress is, it’s most commonly defined as a household spending more than 30% of their pre-tax income on their home loan repayments.

Digital Finance Analytics has defined mortgage stress as when homeowners spend more on their repayments and other living costs than they earn.

Mortgage stress is typically the step before a mortgage arrears or default – means the homeowner has missed a payment or a series of payments.

Keep in mind the 30% figure isn’t a hard and fast rule - it can be more relevant to lower-income households. For instance, some high-income household opt to pay over 30% of their income towards their loan repayments. This is typically because they have sufficient funds to still cover other expenses e.g. food, healthcare, etc.

New research from Roy Morgan revealed 1.01 million mortgage holders were at risk of mortgage stress in the three months to October 2022. That’s around 22.6% of households experiencing mortgage stress. Future projections show over 1.1 million mortgage holders will be at risk of mortgage stress in January 2023.

How to tell if you’re in mortgage stress

If you feel as though your mortgage is more of a burden (than usual) on your life and financial wellbeing, then there’s a good chance you may be in mortgage stress.

One way to work out if you’re at risk of mortgage stress would be to calculate if your repayments are more than 30% of your overall household income. Also consider what would happen, in those calculations, if your income decreased or your home loan interest rate increased.

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

• You’re living paycheck to paycheck
• You’re unable to budget for unexpected expenses e.g. car repairs, medical bills
• You no longer have the funds to afford luxuries such as dining out, ordering takeaway, entertainment

You can also ask yourself the following questions:

• Are you using your savings for household expenses?
• Do you pay more than 30% of your pre-tax salary to your home loan?
• Are you relying on family or friends assistance to help pay bills?
• Have you fallen behind in more than one scheduled home loan repayment?
• Have you stopped treating yourself (going out, taking holidays) because you need the money to pay bills?
• Are your money worries affecting your health and personal relationships?

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. You may need to spend extra money on medicine, education or a holiday. So be sure to redo your budget whenever your circ*mstances change. Also, don’t forget to add a buffer or ‘breathing room’ in case of emergency. And, if you don’t have a budget, maybe it’s time to create one.

Ask yourself, “Is there anywhere I can make changes to trim my expenses down?”

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 stick with your budget as much as possible.

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 sub-account, you’d only be charged interest on $450,000 of the loan.

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

6. Consider a split loan

Asplit loanrefers 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 anoffset sub-accountand 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.

Find out more about the benefits of split rate loans.

7. Buy within your means

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 cancelling credit cards can reduce the temptation to overspend. The same rule applies for buy-now, pay-later services.

9. Have an emergency fund

An emergency fund can provide a cushion while you get back on your feet financially, especially if unexpected life events occur.

10. Speak to a financial counsellor

Many not-for-profit organisations offer free financial counselling to guide you towards a solution or inform you what your next steps could be. You can call the National Debt Helpline between 9:30am and 4:30pm Monday to Friday on 1800 007 007.

If you want to see how much you could borrow with loans.com.au, check out our borrowing calculator.