Let’s Talk About You & Mortgage Stress

The 6.1% inflation rate and 1.85% cash rate puts your home loans at risk of default. Here are 8 tips to prevent and manage mortgage stress.
joseph@itssimple.com.au

joseph@itssimple.com.au

August 9, 2022

Managing mortgage stress header

Post-pandemic lockdown, consumers are back to travelling and on a purchasing spree. Add in the month-on-month inflationary upward pressure resulting in the rate rises you’re seeing.

Inflation is at an all-time high of 6.1%, and the interest rate jumps to 1.85% in just four months. While some of us are better at financial planning and budgeting, other people may just need that extra help to manage the mortgage stress they may be experiencing.

In case you’re new to home ownership and feeling stressed about the rising interest rates, here are some tips on easing those concerns – you may even save some money if you play your cards right!

“Average homeowners with a $330,000 outstanding balance will have to find about $90 a month more for repayments as a consequence of this decision today, on top of around $220 extra in repayments since early May,” Treasurer Jim Chalmers said.

Since the rates continue increasing, it’s important to stay ahead of your loans and control your future. Here are 8 tips to avoid defaulting on your loan and manage mortgage stress: 

Let’s Talk About You & Mortgage Stress

What is mortgage stress? 

There is no hard definition of mortgage stress. But in simpler terms, it refers to stress related to increased home loan repayments. It happens when you struggle to pay your loans. 

Another way to define mortgage stress is when you spend over 30% of your income on loan repayments. As a result, you suffer financial stress paying other bills and expenses.

What causes mortgage stress? 

There are many reasons why you experience mortgage stress. It can be because of your work, expensive cost of living, unexpected expenses, high interest rates and debts. 

Martin North, principal of Digital Finance Analytics, reveals that 45.2% or 1.7 million Australian households experienced mortgage stress in July 2022. This remarkable level is a sign of pressure from continuous inflation and interest rate hikes. 

While these figures are alarming, it doesn’t mean that your loan will fall apart tomorrow. It means that you should take action to protect your present and future now.

3 ways to avoid mortgage stress

Before you spiral down the trap of mortgage stress, you may do 3 things to dodge this bullet: 

Let’s Talk About You & Mortgage Stress
  1. Borrow within your limits: Before you take out a loan, assess your current and future situation first. You should only take out a loan you are confident in repaying even if your expenses and rates increase. 

It’s also important to factor in any changes that may happen to your income. Using our borrowing capacity calculator, you can estimate how much you can loan from a lender.

  1. Choose the right loan: You may be tempted to stretch your budget to get the loan for your dream home. Be realistic as a home loan is a huge expense. You should choose the right loan for your circumstance to avoid missing out on your repayments.

There is a wide range of options from banks and lenders. You should find competitive deals that match your goals and situation. Our mortgage brokers can help you filter your choices and find a suitable loan tailored just for you!

  1. Prepare for rate hikes: Ever heard of the phrase prevention is better than cure? This doesn’t only apply to healthcare. Don’t expect the interest rates will go down to 0.1% in the next month, so minimise expenses, keep your debts at a minimum, budget wisely and consider your repayments. 

Let’s crunch numbers. On a 30-year $500,000 loan, if your interest rate is 4%, your monthly repayment is $2,388. If the rates increase to 4.5%, your repayments increase to $2,534. Can you afford a monthly increase of $146? Think about this before you take out a loan.

You can use our loan repayment calculator to check how different interest rates will affect your repayments. 

5 ways to manage mortgage stress

If you see yourself experiencing mortgage stress or on the brink of experiencing it, here are 5 tips to help you manage your repayments:

Let’s Talk About You & Mortgage Stress
  1. Consolidate your debts: Mortgage stress is already overwhelming. If you have other debts, such as car, personal, or credit loans, managing them can be overbearing. One thing you can look into is debt consolidation

Combining your loans into your home loan allows you to make one repayment each month instead of managing several loans. Convenient, right? But there’s more. Debt consolidation also helps you save on the interest rate you pay on your debts!

  1. Shop around for better rates: Is your loan rate still competitive? Is your current situation in line with your home loan? If you answer no to these questions, it’s time for you to refinance

Refinancing means replacing your existing mortgage either with your current or a new lender. This can help you lower your rates. For example, if you have a $600,000 loan with a 3.39% interest rate, you pay $2,719 monthly. 

What if there’s a lender who can offer you 2.59%? Not shopping around and refinancing to a more competitive rate will lose you $250 per month. That is $3,000 a year!

  1. Save through your offset account: If you have an offset account, you may want to take advantage of that. Saving through your offset account reduces the total interest you pay.

For example, if you have $40,000 in your offset account, and your home loan is $500,000, you only pay the interest on $460,000. So, you save thousands on the interest you pay over the life of your loan.

  1. Redraw extra repayments: If you’re on a variable rate, and you managed to make extra repayments on top of your monthly repayments, you may access your redraw facility.

This is how it works. If you opened a redraw facility 5 months ago and made additional monthly repayments of $500, this amounts to $2,500. You not only save on the interest paid, but you can also access the extra $2,500 in case you need extra cash flow.

  1. Talk to a broker: Managing your finance can be overwhelming. Since the market is wide and highly competitive, you may lose your way figuring out everything on your own. Getting in touch with a great broker can help you save time, energy and thousands on your loans. 

Expert mortgage brokers can assess your situation, weigh your choices and figure out the best option you have. If you talk to a broker, they can help you determine hidden costs, find better rates and avoid the risk of defaulting on your loan. 

They can also help you negotiate with your lender in case you can be granted a temporary extension, hardship variation or repayment holiday to help you recover and catch up with your loan repayments. 

Want a hassle-free loan journey?

With many Australians in danger of losing their homes, it’s time to act now so that you won’t be one of them. Get in touch with our expert brokers for a free consultation that will help you protect your home today and tomorrow.

Since everyone’s situation is different, we’re here to guide your choices to a solution that will meet your goals and needs. 

Have a question? You can always ask with just one click! 

Want to own your home now? Stay tuned for our upcoming blog about low home loan deposits that may help you enter the property market sooner and wiser.

joseph@itssimple.com.au

joseph@itssimple.com.au

joseph@itssimple.com.au

joseph@itssimple.com.au

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