Mortgage stress: The what, why, and how

Rising interest rates and cost-of-living pressures can put household budgets under pressure. For many, their single biggest expense is their home loan repayments. When your mortgage repayments are taking up more and more of your income, you might have found yourself in ‘mortgage stress’.

What is mortgage stress?

There are a number of statistical definitions of mortgage stress, but it ultimately means different things to people in different financial circumstances. In broad terms, a household is commonly considered to be in mortgage stress if it’s spending 30% or more of its combined pre-tax income on mortgage repayments.

Of course, this scenario may present a far greater source of stress to people living on low incomes than for those on high incomes, given there're a number of generally ‘fixed’ costs of living (such as food and utilities). Spending 30% of your income on mortgage repayments mightn’t be too onerous for those with considerable disposable income left over once all their bills are paid.

Polling company Roy Morgan has been measuring mortgage stress in Australia since 2007. It considers a person at risk of mortgage stress if between 25% and 45% of their pre-tax household income is going to mortgage repayments, based on income levels and spending. Here’s a Roy Morgan graph showing historical mortgage stress levels in Australia:

A more usable definition of mortgage stress is simply when a household finds it difficult to cover their mortgage repayments and meet their other expenses.

What causes mortgage stress?

Households can be pushed towards mortgage stress through no control of their own. It can occur when:

• Variable interest rates are hiked

• Other expenses increase, or new expenses are added

• Inflation causes the cost of goods and services to rise

• Household income is reduced through employment changes, sickness, etc.

How to tell if you’re in mortgage stress?

Different people have different measures of financial discomfort but in simple terms, if you feel you’re regularly struggling to meet your mortgage repayments, there’s a good chance you’re in mortgage stress.

This could be the case even if your mortgage repayments are less than 30% of your income – as is the rule of thumb – but it pays to do the calculation to understand where you stand against the benchmark.

If you think you might be in mortgage stress, you should ask yourself:

• Are you regularly dipping into your savings to pay for everyday expenses?

• Are you contributing anything to your savings at all?

• Are you regularly asking family or friends for help to cover your bills?

• Are you worried about how you’re going to make your next home loan repayment?

Mortgage stress often occurs before a home loan falls into arrears or default. If you fear it’s just a matter of time before this happens, here are some steps you can take.

Ways to avoid mortgage stress

Some steps of avoiding mortgage stress are easier to take than others, but let’s consider all the alternatives.

1. Increase your income

It seems an obvious place to start, but increasing your income could alleviate some of your financial burdens, and there are a number of ways you can do this. You can reconsider your current employment and look around for a better paid role, take on extra work, start a side hustle, or rent out a spare room or storage space. It may also mean looking at opportunities for additional training or taking on a specialisation that may boost your earning potential.

2. Review your budget

If you don’t have a budget, then making one is a vital first step to help you get a clearer picture of exactly where you stand. By evaluating all your incomings and outgoings, you may identify opportunities to cut back on some non-essential expenses. Obvious changes may leap out at you as you go through the exercise.

3. Revisit your home loan

When you’ve done all you can to cut your unnecessary or excessive expenses, it’s time to look at your home loan. After all, it’s wise to reassess your mortgage every couple of years to check that it’s still the best loan for you, is competitive compared to others in the market, and provides the features you need.

As a first step, you should speak to your lender to see what you can do to ease the financial burden of meeting your home loan repayments, even if it’s just a temporary fix to keep you from defaulting on your loan. Some options are:

• Reducing your repayments
  You could change the frequency of your repayments or swap to interest only (IO) repayments in order to reduce your repayments.

• Accessing any extra funds in your loan
  If you have money available to you in either an offset or redraw facility, it could be time to access it to help you repay your home loan.

• Restructuring the loan
  This may mean moving from a variable to a fixed rate, or vice versa, or splitting your loan in a bid to bring your regular repayments down. It could also mean extending your loan term if that's an option.

Bear in mind, these alternatives will likely cost you more in the long run and could attract additional costs and fees. You’ll need to take these into account when you determine whether a restructure will benefit you.

4. Refinance your home loan with another lender

If there are simply better home loans on the market than the one you hold, it may pay to refinance to take advantage of a lower interest rate. Refinancing can save you money on your mortgage repayments in the long-term, but it will likely cost you in the short-term. You’ll need to be certain any reduction in repayments are worth the cost of refinancing.

As a general rule of thumb, it may not be worth refinancing your home loan unless your interest rate drops by at least 0.5% to 1% p.a., and some experts say 2% p.a. is the magic number, but everyone’s circumstances will differ. Sometimes it may be worthwhile to refinance to a loan offering features better suited to your financial needs. The table below features some of the most competitive refinancing interest rates on the market:

Important Information and Comparison Rate Warning

Some lenders may also offer special refinance incentives, such as cashback offers, to offset some of the costs of taking out a new home loan. These may come with conditions attached and sometimes only extend to certain mortgage products, so you’ll need to consider whether refinancing to achieve lower mortgage repayments will be the best move over the longer term as well.

5. Downsize your home

If you're struggling to pay the mortgage on your home, you might need to ask yourself whether it would be better for your circumstances to downsize. Downsizing doesn’t necessarily mean moving into a smaller home, although that is one alternative. It could also mean selling the property you have and buying in a more affordable area. In some cases, you may be able to afford a bigger property in another location.

If you've built up some equity in your current property, selling it means that equity could go towards a down payment on a less expensive home. This will not only reduce the size of the home loan you need (and therefore, your mortgage repayments) but may also effectively increase the size of your deposit, potentially securing you a lower interest rate as well.

Selling your home may seem like a big step to take and there are many variables to consider if you’re thinking of going down this path. Again, there will be costs involved with selling one property and buying another, but downsizing can be an effective long-term solution to counter mortgage stress.

In mortgage stress? Where to seek help

Are you in a state of mortgage stress? It’s wise to seek financial counselling to help you understand what options may be open to you before you find yourself in a desperate situation. There are many organisations in Australia that offer free help and can assist in getting you into a better financial position. Here are a few:

Organsation	Contact
National Debt Helpline	1800 007 007
Mob Strong Debt Helpline (for Aboriginal and Torres Strait Islander peoples)	1800 808 488
Salvation Army Financial Counselling Team	1800 722 363
Anglicare Financial Counselling	(02) 8624 8600
Wesley Mission Financial Counselling	https://www.wesleymission.org.au/find-a-service/mental-health/counselling/financial-counselling/

Image by Christian Erfurt on Unsplash.

Article by Jacob Cocciolone in June 2022. Updated 7 November 2024.