The generally accepted definition of mortgage stress is when 30% or more of gross (pre-tax) household income goes towards paying off the mortgage. This means if you have a monthly income of $10,000, repayments of $3,000 or more would place you at the stress threshold. The likely proportion is much higher after tax.
Of course, you may have a high income and feel the effects of this percentage less as essential living costs generally remain the same across income bands. But for many Australians, spending a third or more of their earnings on a home loan can often be a struggle.
If you think you might be under mortgage stress, then read on to find out more about how to deal with it.
How to deal with mortgage stress
There are several things you can do yourself to ease the stress, especially if you're only just over the 30% limit.
1. Refinance your home loan
If you're not too far over the 30% benchmark, then refinancing your mortgage could be worth a look. Refinancing to a lower interest rate could lower your repayments by hundreds of dollars per month, putting thousands back in your pocket over the course of a year. However, there are usually costs associated with this as you are essentially signing up for a new home loan.
If you've owned your home for a while, chances are it's gone up in value and you've improved your equity position. Refinancing could allow you to effectively unlock that equity and obtain more competitive loans.
Another thing too is that you'll have to assess why you're in mortgage stress. If you or your partner has lost or changed to a lower-paying job, a new lender might determine you can't service your loan. You might have a new car loan, for example, eating into your borrowing power and budget. Being unable to refinance yet stuck with paying a high interest rate is often referred to as being in a 'mortgage prison'.
See Also: InfoChoice Refinance Home Loan Calculator
2. Lower your repayments
If you've been paying extra into the home loan and interest rates are falling, you could switch to a lower repayment.
However, if you can afford it, it could be good to fight the urge to lower the minimum repayment and continue paying a little extra into the home loan if you are on a variable rate.
Keeping the repayment higher than minimum has a two-pronged effect: One, it gets you used to paying a higher amount, so if interest rates rise again, you won't be affected materially - more of the repayment will just go to paying interest instead. And two, it could shave years off your home loan and lower the interest payable considerably.
3. Consider using your offset or redraw
Both offset and redraw accounts can lower interest payable. While this doesn't necessarily change repayment amounts, it could shorten the length of your loan and save thousands in interest over the years.
Similarly, if you have a pile of money in an offset or redraw, consider withdrawing it to pay off other forms of debt with higher interest rates. If you have $20,000 in the account and a $20,000 car loan, you could pay off the rest of this car loan (if it lets you pay the loan off early) and eliminate one pesky repayment from your budget. Such a move is called opportunity cost.
Read Also: Redraw vs Offset Accounts
4. Switch to interest-only repayments
This will reduce your monthly repayments quite a bit, but it's only a short-term solution, as you're not paying off any principal. It could be useful if you have some short-term cash shortfalls, such as being unable to work, being on maternity leave, or some other big financial hit.
Lenders generally prefer this option to falling behind on your mortgage, so it's best to get on the front foot here. Many lenders will allow you to switch to interest-only up to five years, and you might be able to extend for a further five. Be aware, however, that your repayments will be higher at the end because the principal has been condensed into a shorter timeframe. This is effectively 'kicking the can down the road'.
5. Examine your spending
Have a look through your bank and credit card statements to see if there's anything you can cut down on to release some money each month. Things like too many Uber Eats, TV subscriptions that you don't use anymore, cabs to work when you could walk or lots of impulse purchases all add up and could push you into the red zone.
Similarly, it could be a good opportunity to review your phone and internet plan and your energy plan to make sure you're getting a better deal and picking a plan more in line with your needs. Once you've identified your bad habits or money sinks, make a budget and try to stick to it most of the time. You may be surprised at the difference.
See Also: InfoChoice Budget Planner Calculator
6. Earn some more money
At the end of the day, there's only so much scrimping and adjusting around the edges you can do. The next step might be to make extra money. This might be through getting a better job, picking up a second job, your partner returning to the workforce, selling items, negotiating a pay rise, working overtime hours, or monetising a hobby such as photography.
You will generally have to disclose to your lender that you're going to change jobs, and you might be unable to refinance if you have changed industries recently.
How much of my income should go to home loan repayments?
Although the general rule of thumb is no more than 30% of income, higher-income households might find paying this proportion manageable, as long as their other expenses aren't too luxurious. If you're finding things a bit tight every month, however, then you're paying more than is comfortable or safe, and you need to take action.
Many lenders use HEM - the household expenditure measure - to determine a borrower's living expenses and their borrowing power. Developed by the Melbourne Institute, HEM assesses expenditure based on the Australian Bureau of Statistics' household expenditure survey. It is calculated using the median spend on absolute basics, plus the 25th percentile spend on discretionary basics, while it excludes non-basics.
ABS's last full HES (2015-16) put average household spending at $1,425/week. Today, lenders compare declared expenses with indexed HEM/HPI benchmarks, so benchmark dollar amounts are higher than that 2015-16 base, even though the spending mix hasn't been re-surveyed.
Identifying mortgage stress
You shouldn't just look at the 30% rule of thumb, as everyone's circumstances are different, but the symptoms of mortgage stress are broadly similar:
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You're living from payday to payday and you're struggling to pay your mortgage and other bills on time,
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You've recently lost your job or have had your hours reduced,
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You've had to borrow money - either from friends or family or in the form of a personal loan - to pay for regular expenses,
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Your existing home loan is interest-only and you haven't built much equity, and
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Your financial situation is causing health and relationship issues.
Avoiding mortgage stress before it hits
If you're worried about falling into mortgage stress, or you're planning to buy your first home, it's important to take steps to prevent your repayments from becoming uncomfortable.
If you already have a home loan, then trimming your budget or refinancing can help you to swerve mortgage stress. If you're about to enter into any other debt agreement, then think very carefully before accepting it because it'll add to your monthly outgoings.
If you're about to take out a home loan, then you need to be very realistic about how much you can afford. Use a borrowing calculator to work out how much you can pay each month without overstretching yourself. It's important to build in a savings plan to these calculations, too, to create a buffer.
Read Also: Top Money-Saving Tips for Australians
You'll be paying a mortgage for a long time and at substantial cost, so it needs to fit you. Look at cheaper suburbs, a slightly smaller property or maybe even a different town or city. Once you've built up some equity, you can think about upsizing or moving nearer to your ideal postcode.
Don't suffer in silence - reach out
Mortgage stress isn't just financial, it can affect your sleep, your health and your relationships.
There's help out there, and you should access it as soon as possible so that you stay at the "Cutting out my least favourite TV subscriptions" stage rather than the "I'm facing bankruptcy and my home loan is in default" stage.
You can reach out to your lender and, in many cases, work out a payment plan. Many lenders prefer you to contribute something, or work out some sort of agreement, rather than to fall into arrears or even default. This looks bad not only for you but for them as well, as recovering funds and the home is a painstaking process for all involved.
There's also the National Debt Help Hotline on 1800 007 007, for example, or the Department of Human Services' crisis and special help team, as well as Lifeline on 13 11 14 for emotional support.
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