Prevent yourself from falling into mortgage stress and know what to do if you're already in it
According to a recent survey conducted on finder.com.au, a staggering 35% of Australians have experienced 'mortgage stress'.
So what exactly is mortgage stress and more importantly how can homeowners deal with it?
Mortgage stress refers to when a home owner is paying over 30% of their income towards repayments on their home loan. When funds are low or homeowners live beyond their means then this stress is more likely to occur. Additionally, the continual rise of interest rates, depressed economic conditions, unemployment, unexpected medical problems and a sluggish housing market can only add to this stress.
How to manage mortgage stress
Mortgage stress could more accurately be described as "home buyer stress". There are some things you can do about it to help to manage the stress.
- Move your loan over to an interest-only loan - An interest-only loan may be an option if you find that you're experiencing mortgage stress. Contact your lender and find out if you have an interest-only payment option on your type of loan. If so, then do it to help minimise the stress. It's important to note an interest-only loan will eliminate the portion of your repayment which goes towards paying off the outstanding loan balance. This means while your loan is interest-only it will not get smaller, nor will you make progress paying it off.
- Ask your lender for assistance - Contact your lender and let them know that you're worried and in trouble. They may be able to reconfigure your payments or allow you a repayment holiday for a short period. You'll need to provide to them all of your expenses and be able to demonstrate that you're truly in need.
Tips to battle mortgage stress
- Cut out things that are not necessities like eating out or takeaways.
- Opt for groceries in bulk. You'll save money and you can even share with loved ones.
- If you're serious about saving money then quitting smoking will be that much easier. It's astonishing how much you'll save not to mention the health benefits.
- While you are at it with quitting smoking, you might as well quit coffee, too. You would be surprised to learn that many people's coffee habits cost them thousands of dollars per year.
- Save up and buy quality items. A mistake many people make when trying to save money is to buy 'cheap' items. You end up spending more money in the long run because these items rarely last.
- Pay more than the minimum repayment amount. If you get in the habit of doing this right away then you will pay off your loan much faster.
- Be in the habit of budgeting before you get a home loan. Know what you can afford and only borrow what's reasonable and what you know you can pay back. Know what will happen to your repayments if interest rates rise by as much as 1% p.a. so you give yourself some wiggle room.
How to avoid mortgage stress
Learning tips and tricks to manage stress once you have it is useful, but for most it may be easier to avoid it in the first place.
- Start an emergency fund - If there's one constant in life it's that it's always changing. You never know what will happen to you in life so it's important to be prepared for life's challenges. One way to do this is to have an emergency fund in place. Ideally, this should cover at least six months of living expenses. This way, if something unexpected comes up (i.e. job loss, medical emergency) then you'll have a little cushion to help you along the way.
- Get a house you can afford - Many problems arise from borrowers who bite off more than they can chew. Choosing a home that is well within your ability to pay off is much less stressful than wondering how you'll make repayments each month - you can do this through a borrowing power calculator.
If you do end up in the unfortunate position of having to sell your home, make sure you do your research and understand the costs involved. Being able to sell for the appropriate market value might just save you a default on your credit file.
Bridget Sakr from Genworth talks Hardship solutions:
Learn more from Bridget Sakr about LMI and Genworth: here
What do I do if I lose my job?
Losing your job is a terrible thing for many reasons, not the least of which is an inability to make repayments on your home loan. If you find yourself in this situation then you should look at the following information so you make the right decisions to safeguard your home.
- Act immediately - Losing income can be depressing and many people react by doing nothing. This is the wrong thing to do. You need to act swiftly and it may be necessary to borrow from family or friends in order to maintain your good standing with the lender.
- Don't miss payments - No lender will extend credit to you if you're not even able to maintain payments on your first loan so keep it current and it may help you later down the track.
- Be careful about approaching your lender - In some cases, it's a good idea to let your lender know about your change in job status. However, not all lenders will be quick to help you. Some lenders might be willing to work with you but some will offer you the solution to discuss options only after you've missed several repayments.
The reason for this is because if you have significant equity in your home then this protects the lender against loss. If you want to take out additional loans to help cover your repayments then this will deplete your equity and will no longer protect your lender. Missing repayments only helps the lender and is not sound advice for you to follow. Take precautions to ensure you do not miss a payment in order to have the ability to help yourself if the situation arises.