Understanding Mortgage Stress and How to Manage It
Key Takeaways
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Definition
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Mortgage stress is when mortgage holders struggle to make repayments. It occurs when repayments take up more than 30% of a household’s income.
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Effects on Mortgage Holders
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A borrower may experience financial strain and may end up in significant debt. Missed or delayed repayments can negatively impact a borrower's credit score and may affect their ability to take on future loans.
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Effectively Managing Mortgage Stress
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Mortgage holders must carefully manage their finances and maintain robust savings to prepare for the unexpected. Borrowers may also opt for refinancing or restructuring to help them make repayments.
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Benefits of Loan Refinancing
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Loan refinancing can help you get lower interest rates and a shorter loan term. It can also give you the freedom to choose your loan type and to access your home equity. Overall, refinancing helps you with financial flexibility, giving you the ability to pay for important expenses and to reach your future financial goals.
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In the months leading to December 2023, research shows an increased risk of mortgage stress among borrowers, with December showing the highest levels. According to Roy Morgan, 1,527,000 Australians are in or at risk of mortgage stress in part due to rising interest rates. Although these figures aren’t as high as in mid-2023, the rising trend is still a cause for concern for millions of Australians.
What is Mortgage Stress?
Mortgage stress is when a borrower experiences difficulty in making mortgage repayments. It happens when a borrower spends a significant percentage (typically around 30% or more) of their income on repayments. Once a borrower crosses that threshold, they can struggle to pay for their other living expenses, which can jeopardise their ability to continue paying for their loan.
What Causes Mortgage Stress?
Various factors may affect borrowers’ ability to make loan repayments. Here are some of the common ones:
- Interest rate increases: For those with adjustable interest rate loans, a sudden increase in market rates can lead to a huge financial strain. There are times when interest rates can double in just a few years, and to some, this difference is extremely difficult to keep up with.
- Unemployment: An income reduction or loss of employment can put borrowers at risk of mortgage stress. This is especially true during low job security and high unemployment rates.
- Unforeseen events: Homeowners can experience major events like disasters, illness, or accidents. These events come when people least expect them and can put a dent in one’s finances.
- Market Fluctuations: A decline in property values or an economic downturn can impact a mortgage holder's ability to amortise or sell their property.
What Are the Consequences of Mortgage Stress?
Mortgage stress can impact all other aspects of a borrower’s life. If borrowers struggle with paying their loans, they’ll also struggle with paying other financial responsibilities. It will be harder to pay bills and to prepare for any setbacks that may come their way.
Once borrowers miss payments or accumulate debt, their credit scores can be affected, impacting their ability to secure loans or credit.
In severe cases, mortgage stress can lead to loss of home ownership. Once a mortgage holder can no longer make repayments, control of the property can be taken by the mortgagee, who could sell the property, displacing the borrower and their family.
How You Can Manage Mortgage Stress
Mortgage stress is mostly brought upon by factors you can’t control. Sometimes, the economic landscape is simply unfavourable. However, there are ways borrowers can manage their finances to assist their capability to make repayments. Here are some ways to do it:
1. Budget and Savings
Carefully budget your expenses so that you have savings. Regularly review your budget and find areas where you can cut unnecessary spending. Always keep contingency funds so your finances won’t take a blow in case of emergencies.
2. Professional Advice
Don’t hesitate to seek professional financial advice. Consult with a financial counsellor or advisor to review your overall financial situation. They can guide budgeting and debt management and provide potential solutions specific to your circumstances. If you’re at risk of foreclosure, you may need to seek legal advice to understand your legal options.
3. Sale or Rent Options
If possible, consider selling your property or renting it out to help generate income. Doing so can help alleviate the pressure of making repayments during difficult times.
4. Loan Restructuring
Loan restructuring or modification is changing the terms of your existing loan to help make payments easier. It is usually pursued by those who are greatly struggling with repayments or are at risk of defaulting. Restructuring can involve changing the interest rate to interest only for a period.
5. Loan Refinancing
Refinancing involves taking out a new loan to pay off your existing one. The new loan typically has better terms and offers more flexibility regarding payment and the option to cash out equity in your home.
Benefits of Refinancing Your Home Loan
- Lower Interest Rates and Monthly Payments: With refinancing, you can opt for a loan with better interest rates, which helps you lower your monthly payments.
- Reduced Loan Term: Refinancing can help borrowers pay off their home loans faster. If you select a loan with a significantly lower interest rate, you can shorten the loan term and still pay more or less the same monthly payment.
- Convert from Variable to Fixed-rate Interest (or vice versa): A variable rate mortgage starts with a lower, fixed-rate interest. However, after the initial term, the interest can increase or decrease depending on broader market rates. On the other hand, a fixed rate mortgage may have higher rates, but the interest rate remains constant throughout the loan term.
With refinancing, you can choose between the two loan types depending on which benefits you more. If the market trends show interest rates dropping or if you expect to earn more in the future, you can switch to an adjustable-rate loan. However, if you need security and stability, you can switch to a fixed-rate loan.
- Access to Home Equity: A cash-out refinance can help you gain access to your home equity. You can then use the funds to pay for large expenses like major home renovations or investing in property, holidays, or other items.
- Debt Consolidation: If your home has sufficient equity, you can use a cash-out refinance to consolidate debt into a single, lower-interest mortgage payment. Doing so can be useful in tackling high-interest debts like credit cards and personal loans.
Find the Right Loan Solutions
Mortgage stress is a pressing problem that’s been on an upward trend since 2023. It’s crucial to find the best solutions to help you avoid financial troubles. Darkhorsefinancial.com.au are experts on loans who can direct you to a solution whether you’re experiencing mortgage stress or seeking a great new home with the perfect home or investment loan to go with it.
