Mortgage stress is the term used to describe the unfortunate situation where borrowers are struggling to make their home loan repayments. Typically, it occurs when mortgage repayments are beyond 30% of borrowers’ pre-tax income. Mortgage stress can also place a strain on borrowers’ relationships, as well as their ability to meet general everyday living expenses. But there are ways you can avoid getting yourself into this situation. We’ll explain how in this article.
What are the main reasons for mortgage default?
Interest rates in Australia are currently at record lows levels. This can tempt borrowers to over- extend themselves. In other words, borrowing too much on the assumption that interest rates will remain low. If interest rates rise and you have a home loan with a variable interest rate, your repayments will also rise. You always need to remember that a home loan is a long-term commitment. Even a small increase in interest rates over time can impact your ability to comfortably meet your repayments.
Your circumstances may also change over time. For example, if you lose your job, become ill and can’t work for a period of time, or you and your partner decide to start a family, this will have an impact on your short-term income levels and/or your long-term spending needs. Relationship break-ups can also result in mortgage defaults.
How can I avoid mortgage stress?
There are a number of ways to avoid mortgage stress, including:
Not borrowing too much in the first place. Don’t stretch yourself too far. You may be better off resetting your home expectations and borrowing less for a cheaper home. That way, you’ll have some wriggle room if interest rates rise.
Getting ahead on your repayments while rates are low. Make extra repayments whenever you can to give yourself a buffer for the future, if necessary.
Limiting your exposure to other forms of debt. Be especially careful with credit cards. It’s too easy to spend unnecessarily with them and the interest rate on the debt is incredibly high.
Having life and income protection insurance. You and your partner should have enough life insurance to cover your home loan debt if the worst happens. In addition, having adequate income protection insurance will protect you if you lose your job or become ill and can’t work for an extended period of time.
Starting an emergency fund. Put a small amount into a separate account each week that you only access and use in an emergency. Ideally, you should aim to save at least six months’ worth of living expenses. Having this account as a back up will give you peace of mind.
Working hard to earn yourself a promotion or securing a higher paying new job. The higher your income, the less likely it is that you’ll experience mortgage stress (provided you don’t overspend on your increased income!)
What can I do if I’m experiencing mortgage stress?
If you’re already experiencing mortgage stress, you can get yourself out of the situation by doing the following:
Evaluating your spending patterns and reducing your expenses. By reviewing your budget you will likely identify expenses you can cut back on without significantly impacting your lifestyle.
Approaching your lender. Ideally this should happen before you start missing repayments. You may be able to work out an alternative repayment arrangement, such as a temporary freeze on repayments or a reduction in the regular amount you pay by extending the loan term. You could even move the loan to an interest-only arrangement for a short period.
As you can see, there are several strategies you can use to avoid and manage mortgage stress.
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