What is Mortgage Stress?

Mortgage stress is a situation that no homeowner wants to find themselves in. Beyond creating pressure to meet repayment obligations, mortgage stress can also leak into your personal life, impacting your physical and mental health.

David Hyman, co-founder, and CEO of Lendi Group breaks down what mortgage stress means, why it’s a big problem, how to manage it, and how to avoid it in the first place.

What is mortgage stress?

With Australian property prices higher than ever and interest rates likely to keep rising from the historic lows we’ve seen; some borrowers may find themselves overextended or in mortgage stress.

Mortgage stress can mean a few different things, depending on your individual circumstances but in general terms, mortgage stress occurs when a household spends over 30% of their pre-tax income on home loan repayments.

Mortgage stress isn’t something that just affects low-income borrowers; high income borrowers can be at risk too. It’s important for all borrowers to understand the options available when structuring their loan, so they can best safeguard themselves against the impacts of moving interest rates as well as expected and unexpected changes to their expenses which may add strain to the household budget.

What can cause mortgage stress?

Mortgage stress can occur due to several different reasons including:

• People borrowing the maximum amount available to them, leaving them exposed if interest rates rise or their situation changes
• Unexpected expenses or other financial setbacks
• Income loss and unemployment
• Borrowers living beyond their means

When can mortgage stress become a serious problem?

Mortgage stress can become a serious problem when borrowers are unable to make their repayment or meet other obligations. Once you are in the territory of missed or late repayments, the avenues available to restructure your debt start to shrink.

Enlisting the help of a mortgage broker both before taking on new debt and regularly during your loan term, can help you understand how you could structure your loan, taking into consideration both the current environment and your future plans.

Is there a way to avoid mortgage stress?

Mortgage stress can be avoided with a well-planned-out home loan and a rational approach to borrowing. There are a few steps you can take to avoid mortgage stress, which include:

1. Don’t take out a loan you can’t afford to comfortably repay. This could mean you may not be able to purchase your forever home immediately, but you can still make strategic moves towards your goals.
2. Be realistic about your current and future expenses. Before applying for a home loan, make sure that you will be able to repay your mortgage, cover general living expenses comfortably, add money to your emergency fund, and to other savings accounts.
3. Make sure you can handle an interest rate rise. Rates are cyclical so they won’t stay low forever.
4. Talk to a broker to make sure your loan structure works for you. There is a lot to consider when setting up or reviewing your home loan. Make sure you understand how loan features like offset accounts, fixed rates and interest only periods work in the short and longer term.
5. Make extra repayments when you can and live within your means. In today’s low interest rate environment, it’s a good idea to use surplus cash to make additional repayments and get ahead so you’ve a buffer in case your situation changes.

What options does someone experiencing mortgage stress have?

If you’re starting to feel the pinch, it’s better to be on the front foot and explore your options sooner rather than later. Borrowers with a good credit profile, have more options and better rates available to them. Some proactive steps borrowers can take before getting into mortgage stress include:

• Review your budget and current spending habits
• Consolidate your other debts (e.g. car loan, personal loan and credit cards) under your home loan to benefit from lower home loan interest rates
• Refinance or restructure your home loan, possibly with another lender

If you’re experiencing mortgage stress and struggling to make repayments, options available include:

• Consider moving to interest only repayments while you get back on your feet but be aware that your repayments will be higher when you come off that interest only term
• Look into home loan repayment deferral if you are eligible, but make sure you understand the long-term implications of this
• Speak to a qualified financial adviser or get in touch with your lender’s financial hardship support team

How can refinancing assist in relieving mortgage stress?

Keeping on top of your home loan is important for all borrowers not just those heading towards or experiencing mortgage stress.

The benefits of refinancing include consolidating your debts, making sure you are only paying for loan product features you actually use and ensuring you’ve got a competitive rate. Afterall, it’s no secret that lenders charge existing customers higher rates than what they offer to attract new customers.

On average, Lendi owner occupier customers who refinanced this year reduced their yearly repayments by more than $2,000 – that's a significant saving which can help ease the strain.

For any one new to refinancing, what’s the typical process?

Refinancing is the replacement of an existing mortgage with another. When you refinance, you can refinance with your existing lender, or you can move to another lender.

Sometimes it’s easier to stay with your existing lender, but if their home loans and rates aren’t competitive enough, it could be time to move on.

The process of switching to a new lender may sound like a hassle, but it’s a relatively straightforward process, especially with the help of an expert, and most of it can be done online via a platform like lendi.com.au.

When it comes to choosing the right home loan, it’s worth keeping in mind that there’s no one-size-fits-all solution and it’s a matter of finding the right loan for your particular needs.

When your new loan is approved, your old bank will be contacted and informed that you will be switching lender and asked to organise for the loan to be discharged. From there, you’ll authorise the discharge and a settlement date will be set between the lenders at which point your new lender pays out your old loan and you begin making repayments on your new home loan.

What other options do Australians have in terms of hardship assistance?

If your loan repayments are getting out of control, talk to someone who can help you understand your options. Contacting your broker or lender is a good starting point, as they will be able to provide you with range of options to meet your individual circumstances.

You can also use the Australian Banking Association's financial assistance hub to find your bank's contact details and understand what options are available.

Want to compare home loans and see if you can save through refinancing?

At iSelect, we’ve partnered with Lendi who make the process of comparing home loans online seamless and straightforward. Click here to compare home loans today or give Lendi a call on 1300 186 260 (08:30-18:30).

Last updated: 15/03/2022