Once upon a time, banks would lend would-be home owners a sum of money based on repayments being less than 30% of the borrower’s gross income. As interest rates fell in the early 90s and competition from non-bank lenders flourished, home loan providers relaxed this rule and increased the flexibility of loans generally. Many Australians are now paying dearly for ignoring a rule which was initially put in place to protect us.
How to identify mortgage stress
In the most basic terms, mortgage stress means that a person is struggling to meet their loan repayments. Three different levels have been identified:
- Mild stress. People are up to date with their mortgage payments but have some concerns about their ability to meet their commitments in the future.
- Medium stress. People are concerned about their ability to meet their commitments and may have already missed a payment. They may also have reduced their spending, and are becoming increasingly reliant on credit cards to meet their expenses.
- Severe stress. People are using other forms of debt to meet their mortgage repayments and are dipping into savings or equity. They may be more than three months behind in repayments and are looking to sell the property because they cannot cope.
How to manage mortgage stress
Mortgage stress does not necessarily mean the end of home ownership. Homeowners can take steps to rescue their personal financial situation.
There are many changes you can make to your loan to help reduce mortgage stress. Speak to your lender to negotiate amendments to your loan including: extending the loan term, converting to interest-only repayments, obtaining a lower interest rate, accessing the equity in your home, or restructuring or refinancing your loan. The sooner you contact your lender, the more likely they will be able to find you a solution. (If your not confident in speaking to your lender, or unhappy with their response, we can help you find a Mortgage Broker that will work on your behalf for the best rate available for your circumstances)
Similarly, there are many measures you can take with your home to help ease mortgage stress, including: renting out your whole home, taking in a boarder, or as a last resort, selling your home. Renting part or all of your home or taking in a boarder can provide you with a valuable source of income to help meet living costs. Selling your home prior to repossession generally provides you with a better return and won’t hurt your chances of borrowing again in the future. (Make sure you speak to an accountant and/or financial planner before changing the purpose of your dwelling as there could be unintended tax consequences.)
Your personal financial situation
Finally, you can help ease the pain of mortgage stress by addressing some aspects of your personal financial situation. The most obvious thing to do is earn more money. However, if this isn’t possible, prepare a budget to help identify potential cost savings. Financial counselling should also be considered, as should applying for government assistance or hardship programs that can provide temporary relief. Whatever you do, don’t be afraid to ask for help.
This should by no means stop you from pursuing the dream of home ownership, but as they say, forewarned is forearmed.