What is mortgage stress and how can you manage it?

With the cost of living increasing off the back of the pandemic and interest rates rising, mortgage stress levels among Australian borrowers are high.

Interest rates are likely to continue rising, so it’s important to know how to handle your home loan in these circumstances.

Here we’ll explain what mortgage stress is, how it impacts borrowers, what to do if you’re experiencing it and how to prevent it.

What is mortgage stress?

There are varying definitions of what mortgage stress is but it generally refers to when a household is struggling to make their home loan repayments.

To be specific, some sources describe mortgage stress as when over 30% of a household’s pre-tax income is being spent on mortgage repayments.

Bear in mind that the 30% figure isn’t a hard-and-fast rule, and may prove to be more relevant to lower-income households.

For example, some high-income households voluntarily opt to pay well over 30% of their income towards their home loan. Often they can do this because they still have sufficient funds to cover food, healthcare, education and other lifestyle expenses after making their mortgage repayments.

What percentage of households are experiencing mortgage stress in Australia?

According to Digital Finance Analytics data gathered in April 2022, shortly before the cash rate rose, approximately 42.2% of households in Australia were experiencing mortgage stress.

This high percentage was influenced by:

• The strain that the COVID-19 pandemic has placed on household finances.
  
  
• More borrowers taking out larger mortgages due to high property prices (as shown by the RBA’s rising debt to income ratio figures).
  
  
• Stagnant wage growth and the rising cost of living.

Now that the cash rate has risen, it’s likely that even more households will face financial stress and difficulty meeting loan and bill obligations.

Here is how rising interest rates could impact your mortgage repayments:

How to tell if you’re experiencing mortgage stress

It’s likely you will know if you’re experiencing mortgage stress. While a home loan is a big financial obligation, if you are finding it particularly difficult to make your repayments, you may be in mortgage stress.

You can alternatively figure it out by calculating if your mortgage repayments make up more than 30% of your overall household income.

Even if you’re not in mortgage stress, this calculation can be useful to do. Consider how your finances would be impacted if your income decreased or if your home loan interest rate rose.

As mentioned above, not every household spending over 30% of their income on their mortgage repayments will be in mortgage stress. So, some borrowers may find it more beneficial to review their budget, income and expenses to work out how their mortgage is impacting them.

Does mortgage stress only impact low-income borrowers?

No, mortgage stress can affect anyone – regardless of income level. While lower-income borrowers are more likely to be at risk and be negatively impacted, it can happen to high-income borrowers.

Having other debts and high expenses in other areas of your life can cause mortgage stress even if your home loan repayments don’t exceed 30% of your household income.

How does mortgage stress impact borrowers?

Mortgage stress can have many negative implications across all areas of your life. Mortgage stress can impact borrowers in the following ways:

1. Difficulty making repayments and financial consequences: mortgage stress can make it hard to repay your home loan, which could result in you missing repayments and possibly defaulting on your mortgage. This could potentially lead to you losing your home, gaining a bad credit score and more.
   
   
2. Impacts on your personal life: mortgage stress can place pressure on familial and personal relationships, disrupt social plans and more.
   
   
3. Physical and mental health: financial stress can lead to physical health issues like migraines, heart disease and sleeping problems. It can also contribute to poor mental health.
   
   
4. Poor decision making: sometimes those experiencing mortgage stress are more likely to make irrational decisions e.g. taking out high interest loans or rushing to make investments.

How to prevent mortgage stress

Much of the time, mortgage stress is avoidable. It generally involves having a well planned home loan and a good sense of financial literacy.

Here are some tips for preventing mortgage stress:

1. Borrow within your means: avoid taking out a loan that you cannot comfortably afford to repay – even if it means sacrificing your dream home for a more modest dwelling. Think about whether you’ll be able to afford your repayments if interest rates rise or your income is reduced.
   
   
2. Think before borrowing more money: try to avoid taking out further loans like credit cards and high interest personal loans. Keeping your debt to a minimum will help keep your finances more manageable.
   
   
3. Be prepared with an emergency fund: an emergency fund can provide a cushion while you get back on your feet financially.
   
   
4. Debt consolidation: debt consolidation could make your debt less overwhelming so that you can find it easier to manage.
   
   
5. Choose a home loan that’s right for you: take the time to research and consult with a mortgage broker before selecting a home loan. You want to feel confident that you are choosing a mortgage that suits your needs.

What to do if you’re experiencing mortgage stress

We’ve given you some tips on how to prevent mortgage stress, but if it happens here are some things you can do:

1. Talk to your lender: your lender will have a hardship team who may be able to offer solutions and help with managing your mortgage. Depending on the severity of your situation, they may be able to temporarily pause your repayments or offer a lower interest rate.
   
   
2. Restructure your budget: if you’re in mortgage stress, you may be able to find some relief by reviewing and restructuring your budget to see where you can cut expenses and free up cash flow.
   
   
3. Redraw extra repayments: if you’ve made additional repayments (beyond the minimum) and are in need of cash, you may be able to access this through a redraw facility.
   
   
4. Refinance to a cheaper home loan: whether it’s finding a home loan with a lower interest rate or one with no fees, there may be ways to save on your mortgage repayments by refinancing.
   
   
5. Debt consolidation: mortgage stress can make all of your finances overwhelming. By consolidating debt, you merge other debts (e.g. car loan, personal loan, credit cards) under your home loan so that you make one single repayment each month under your home loan’s interest rate.
   
   
6. Speak to a financial adviser: a licensed financial adviser may be able to offer solutions to your financial stress.
   
   
7. Speak to a financial counsellor: many not-for-profit organisations offer free financial counselling to guide you towards a solution or tell 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.

Your local Aussie Broker can help you find a suitable home loan and will provide guidance if you’re experiencing financial difficulties. Book an appointment to learn more.

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