Mortgage stress

Mortgage stress is a term used to describe a financial situation in which 30% or more of your household income is going towards paying your housing costs – this could be either your mortgage’s fortnightly/monthly repayments or your weekly rent.

Mortgage stress isn’t a strictly defined concept and is more used as a rule of thumb for ‘health checking’ your finances. There are no tangible or immediate consequences for being in mortgage stress though, so don’t panic if you think you may be under mortgage stress.

Homeowners can be pushed into mortgage stress by a number of different factors, including:

• The Reserve Bank of Australia (RBA) increasing the cash rate, subsequently increasing interest rates for borrowers and the size of their home loan repayments
• A change to your employment situation, such as losing your job or being demoted
• Your household expenses increasing, subsequently reducing the amount of income available to go towards your home loan repayments

Anything that either reduces your available income or increases the size of your mortgage repayments has the potential to push you into mortgage stress, if it’s a large enough change.

You can figure out if you’re in mortgage stress quickly and easily, by comparing your income against your housing costs. If you’re spending more than 30% of your total regular income on home loan repayments or rent, you’re likely experiencing mortgage stress.

While there are no immediate consequences for being in mortgage stress, an ongoing state of financial stress could have significant impacts on both your finances and your mental health. Financial crisis can be incredibly stressful, especially if it’s prolonged over a period of months, or even years.

If you end up in mortgage arrears as a result of being unable to meet your home loan repayments, there are a few different paths you could take, including applying for a hardship variation from your lender or selling your property.

Applying for a hardship variation

If you decide to apply for a hardship variation, you’ll typically need to contact your lender’s hardship officer with the details of your loan and explain that you’re experiencing hardship and would like to change your loan repayments.

You’ll need to explain why you’re currently in financial hardship, how long you think you’ll be in hardship for, and how much you can currently afford to put towards your mortgage. Your lender must respond to your hardship request within 21 days and may be able to either pause or reduce your repayments temporarily.

Selling your home

Property-owners who aren’t approved for a hardship variation or don’t anticipate their financial situation improving if they get one may decide to sell their property to (hopefully) pay off and clear their mortgage in full.

If you’re denied a hardship variation and can’t sell your property, your lender may evict you and repossess your home to recoup the money it lent to you.

One of the best ways you can potentially minimise your own risk of mortgage stress is by borrowing a modestly-sized loan amount in the first place. While the idea of a ‘modest’ loan amount will differ between low, medium and high-income households, just keep that 30% rule of thumb in mind.

If a given loan amount would have you spending close to or more than 30% of your income on mortgage repayments, it may be too large a loan amount for you.

If your home loan interest rate is starting to sting, look around for a better one! Refinancing to a home loan with a lower interest rate could reduce your mortgage repayments by enough to help you feel more comfortable and less financially stressed.

If your budget’s routinely getting a little close for comfort, reducing unnecessary spending could free up more money to go towards your home loan repayments, which could in turn potentially reduce your level of financial stress.

Having a rainy-day fund could be the difference between business as usual and mortgage stress if you’re hit by a significant unexpected expense. Being proactive and saving up for an emergency well before one ever shows up is rarely a bad idea.

If you’re confident your income is sufficient to meet your current obligations as long as you allocate it correctly, consider creating a household budget. Having a plan that shows where every single one of your dollars should end up could help you keep a tighter grip on your finances and stay out of financial stress.

If you’re in mortgage stress, your first step should be getting in touch with your lender. Not only is it crucial you let them know about your situation ASAP for disclosure reasons, but the sooner you let them know, the more options they may be able to offer you.

One of the options your lender could offer you is refinancing to a new loan, with a lower interest rate. This could potentially help you reduce your financial issues, especially if there have been interest rate rises since you took out your home loan.

If you’re currently holding several different debts on different interest rates as well as your mortgage, you could consider rolling them all together into one loan on one, relatively low interest rate. For example, you could potentially roll a credit card debt or personal loan into your home loan via a refinance arrangement. This way, you’d likely be repaying the debt at a much lower interest rate.

If you’re feeling overwhelmed or simply don’t know what to do, your best bet may be to speak to a financial counsellor or advisor. Financial counselling is not only invaluable for helping you develop an action plan for improving your finances, but the act of simply talking to someone about your situation could help you feel less distressed.

Financial counsellors offer free and confidential financial advice, usually as part of a not-for-profit community organisation. So even if you’re experiencing financial hardship, counselling will likely be an option available to you.