Kathryn Lee - 17 May, 2019

What is mortgage stress and how can I manage it?

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You may have heard the term ‘mortgage stress’ but do you actually understand its meaning? What does it mean for you and why are so many people suddenly deemed to be in mortgage stress?

We break down what mortgage stress is, how it might affect you and how to avoid it.

What is mortgage stress?

Mortgage stress occurs when your home loan repayments are essentially more than you can afford.

If your mortgage is causing you to have trouble affording your living expenses and bills, putting food on the table, then I’d say you’re in mortgage stress,” Finance expert and author of Wonder Woman’s Guide to Money Natasha Janssen said.

While some institutions say mortgage stress is when loan repayments make up more than 30% of your income, Natasha believes this is probably outdated, depending on your circumstances.

“I think that when interest rates are at historical lows and 30% of your income is going towards the minimum mortgage repayments, you are going to be in trouble when rates start to go up,” she warned.

How does mortgage stress occur?

It can occur for a range of reasons relating to your financial situation, including both personal reasons (losing a job or being unable to work) and due to wider market trends.

“At the moment we’re seeing a rise in what we call mortgage prisoners. These are people who went with what the bank was willing to lend them a few years ago and now the banks have tightened their lending criteria, leaving them in a situation where they can’t afford to refinance to get a lower interest rate, which would ease their cash flow and put them in a better position,” Natasha explained.

Is it common?

Increasingly common, apparently.

Economist Saul Eslake told 7.30 that mortgage stress is higher now than at any point in the previous decade.

What’s more, in December last year, the ABC reported that 60,000 households are at risk of defaulting on their home loans within 12 months.

mortgage stress

What is there to worry about?

Mortgage stress is, well, stressful. Not only that but you could wind up struggling to pay your bills or do the groceries.

Regarding the housing market at the moment, Natasha also says people in mortgage stress risk losing their home and still being in debt to their lender. 

“If a person is at risk of defaulting and potentially losing their home, we’re now in a market where, in a lot of the cities, property values are going backwards. So, if those same people don’t have much in the way of equity, it means that once the home is sold or repossessed, it’s possible the sale amount won’t be enough to clear the debt they owe.”

How to avoid mortgage stress

“The first guideline is to not make your [mortgage] decision based off what the bank is willing to lend you, but to actually have a look at your personal situation, your cash flow and your goals,” Natasha said.

“So, how soon do you want to be debt free, do you want to be able to afford to travel, what other goals do you have and how much of a mortgage can you take on and still afford to achieve those goals.”

Natasha also said when using online calculators to estimate your borrowing amount, always inflate the interest rate.

“Lenders will stress test your mortgage repayment and use a rate between seven and 7.5%. So, if you use a borrow capacity calculator and plug in 4% as the interest rate you’re going to get a different answer. Also, you want to factor in a buffer so there’s room there when rates rise,” she explained.

What can you do if you’re in mortgage stress?

Short of getting a big raise (we wish!), you may need to seek some help with your finances sooner rather than later.

According to ASIC’s MoneySmart, you have options if you’re missing repayments. To start, chat to your lender to work out a payment plan or other short-term solution. For example, you may be eligible for a ‘hardship variation’ that can reduce or defer your payments for a few months.

Natasha agrees that you should call up your lender ASAP to both help ease your stress and, more vitally, protect your credit score.

“If you keep going and start defaulting on your mortgage, that’s going to appear on your credit report. Whereas if you act up front and come to a payment arrangement with the bank, they’re less likely to report the defaults on your report,” Natasha confirmed.

“Every bank has a department that’s there to help you out if you’re suffering financial stress, don’t be afraid to make use of that service.”

The second step is to try and cut back spending and Natasha believes the quickest way to do so is to review your utilities, insurance and other providers and seek a better deal.

You might also want to consider seeing a financial counsellor or seeking legal aid.

Words by Rebecca Mitchell.

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