What is mortgage stress?

Whether you’re applying for your first home loan or juggling your mortgage repayments and your household budget, it is crucial that you avoid mortgage stress.   

Mortgage stress refers to when you struggle to meet your mortgage repayments and maintain your lifestyle. It is commonly defined as when a household is spending 30% or more of its pre-tax income on mortgage repayments. 

Another definition comes from the Australian Bureau of Statistics (ABS), which applies the 30% rule to low-income households specifically (i.e. income in the bottom 40% of Australia’s income distribution).  

This helps to account for how a low-income household earning $70,000 annually would view that 30% figure much differently to a high-income household earning $300,000 annually. For the higher-income household, even if their mortgage repayments were 30% of their pre-tax income, the remaining 60% would be able to support their lifestyle much easier than the case for the lower-income household.  

Whichever way you prefer to define mortgage stress, it may be worthwhile aiming to keep your mortgage repayments below 30% of your pre-tax income to avoid its financial and psychological impacts. 

Calculating mortgage stress

You can use RateCity’s Mortgage Stress Calculator today to assess whether you are already in mortgage stress, or in a stress ‘danger zone’, based on your income and your mortgage repayments. 

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What are the risks associated with mortgage stress?

Being in mortgage stress means you may have a greater likelihood of struggling to meet your mortgage repayments and defaulting on the loan. This is especially true if you are in a rising rate environment, such as when the Reserve Bank of Australia has indicated it is likely to lift the cash rate.

If you were to default on your mortgage, there would be significant consequences, including:

• The lender can sell the property to help recoup its losses
• The property may not sell for a high enough value to pay off the debt
• You may have to sell other assets, or even declare bankruptcy
• Your credit history and credit score will be severely affected and it may take years before you can apply for another home loan. 

There is also the psychological impact of being in mortgage stress, which can have a direct impact on your mental health. Money worries and financial stress can lead to relationship problems, depression and anxiety.

If you do find yourself in mortgage stress, you can talk to your current lender about ways to help reduce your mortgage burden through hardship support and payment plans. 

Contacting a financial counsellor may also be worthwhile. You can locate a free counselling service in your state or territory by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

How do you avoid mortgage stress?

If your circumstances were to suddenly change, you may find yourself in a very tricky financial situation. If you experience a job loss, injury or disability, or even add another child to your family, all of these factors can put greater pressure on your budget and increase your expenses. 

There are a few options worth considering if you are already facing mortgage stress, or hoping to avoid mortgage stress when you apply for your first home loan. 

Don’t borrow at or above your threshold 

The truth is that you cannot control the value of properties in the area you’d like to buy, or the interest rate market, but you can control how much debt you go into for a home. 

It’s important to be realistic about your threshold of what you can afford for a home loan based on your income. If an apartment you’ve had your eye on would put you at the very edge of your spending budget, consider looking for something more affordable for now and then purchasing the dream apartment when you’re in a stronger financial position. 

It’s also recommended that you test your ability to meet mortgage repayments with a buffer of an additional 2-3% interest. Over a 20-30-year loan term, it is expected that interest rates will fluctuate. Use a Mortgage Repayment Calculator to see how much your repayments would be if your rate increased by an extra 3%. If this would severely affect your ability to meet repayments, pay your bills, or maintain a modest lifestyle, consider borrowing a smaller loan amount. 

This way, if you did buy a cheaper apartment and a worst-case scenario happened, you wouldn’t immediately be at risk of default. It’s called a property ladder for a reason - it’s recommended that you climb it. 

Utilise your home loan features

If you’re already repaying a mortgage and at risk of, or facing mortgage stress, it is crucial that you consider utilising your home loan features (if offered with your loan). Home loan features, like an offset account or a redraw facility, can give homeowners much-needed breathing room if mortgage stress is on the horizon.

An offset account helps to reduce the interest charged on your home loan. Any money you deposit into this linked transaction account works to ‘offset’ or lower the amount of interest charged, as if your home loan balance was less the amount in the offset account. For example, if you had a $750,000 home loan with $50,000 in your offset account, you would be charged interest as if your home loan balance was only $700,000.  

A redraw facility may also let you access extra repayments you’ve made over the life of the loan when you urgently need those funds. If your mortgage repayments increased due to rising interest rates, or if you experienced an unexpected job loss, some of the extra repayments you’ve made may be withdrawn to help ease your budget stress. 

Avoid applying for “liar loans”

While it can be tempting to photoshop your application documents or minimise how much debt you’re actually in, these so-called "liar loans" could put you at serious risk of mortgage stress. Not only that, lying on your mortgage application could be considered fraudulent activity.  

A home loan lender will assess your income and expenses to determine your maximum loan size. If you lie in your application, you may be approved for a larger loan than you actually can afford. If one of those worst-case scenarios were to happen, you may be in serious trouble and struggle to meet your mortgage repayments. 

Negotiate a lower rate, or consider refinancing

If you’re already in mortgage stress and desperately looking for some relief, now is the time to pick up the phone and ask your lender to lower your interest rate. And if your lender won’t budge, you could consider refinancing. 

Typically, lenders will offer more competitive interest rates to new customers to encourage them to sign up. Jump online and make a list of some of these lower interest rates being offered to new customers. Then, call your lender and request they stop rewarding new customers and reward your loyalty with a lower interest rate.

You should also take time to research what other banks and lenders are offering refinancers. RateCity’s comparison tables could come in handy here, as you’ll be able to enter your current loan details and see competitive home loan options side-by-side. If your current lender won’t budge on lowering your rate, mention these competitors and threaten to walk away. 

Now, if the lender still won’t lower your rate, you now have a list of more competitive home loans to consider refinancing to and give yourself a rate cut. 

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