What is Mortgage Stress?

For homeowners, few bigger stresses surpass mortgage stress. When mortgage repayments are too much for the household’s income, the concern to keep a roof over one’s head can create lasting anxiety. Here’s what mortgage stress is and how to avoid it. 

What is Mortgage Stress?

Mortgage stress exists when a household’s monthly mortgage repayments exceed 30% of their taxable income. For many Australians, mortgage stress is a real concern, with incomes staying relatively steady compared to both the rising costs of purchasing a home and the increased interest rates we’ve seen in the last few years.

Mortgage stress results in financial strain for those unable—of those who find it difficult to—repay the debt over their home. Basic income expenses lag behind in priority as they do what they can to repay the bank for the privilege of owning their own home. And should a homeowner have an unexpected calamity, such as job loss or a drastic increase in expenses, then their financial burden might be too much and the sale of their property could become a reality.

How can you avoid mortgage stress?

While no guarantee of avoiding mortgage stress, there are some clear-cut guidelines for owner occupiers to consider to avoid the financial burden of too great mortgage repayments:

• Budgeting: A clear and simple-to-follow budget is the first key step many use to mitigate mortgage stress.
• Know what you’re borrowing: Borrowers often attempt to borrow the highest amount possible to chase down their dream home and this can be an unwise move when unexpected interest rate hikes occur or a drastic change in income eventuates.
• Take advantage of mortgage features: Features like redraw and offset accounts can reduce the amount of interest payable on a mortgage. Borrowers will often have their income directed into an offset account and/or any additional funds placed into the redraw account to reduce their financial obligations.
• Consider a fixed rate (if your mortgage broker advises it): Fixed rate mortgages can sometimes be a wise move to avoid forecasted interest rate hikes. But this is a speculative decision that might require advice from a finance expert before committing to.
• Refinance (again, if your broker thinks it wise): Banks are often very competitive and look to take businesses from their large pool of competitors. This means they’re frequently advertising lower rates and introductory offers. Just ensure you know how much you’ll be paying after the introductory rate (often known as a “honeymoon rate”) ends.

Mortgage stress test? What’s that?

Known as a mortgage stress test, our Australian lenders will apply a buffer during the loan application process to ensure a borrower can still afford loan repayment should interest rates hike to a certain level. Often this number is 3% above the loan’s advertised rate, meaning that a borrower must evidence to a lender that they can repay the proposed loan, plus 3% on top of the proposed repayments.

Australia’s financial system has tightened its regulations in the last few years, and borrowers are subject to strict scrutiny when applying for new loans. But just because the bank gives the thumbs up for your loan doesn’t mean mortgage stress is not a risk. Consider your long-term future and weigh up all the potential unexpected events that might arise before committing to a particular loan amount.

Wise investors will have an exit strategy should their property debt obligations become too much. As always, it’s better to be safe than sorry.