Mortgage stress

If you are struggling to keep up with your mortgage repayments each month, you probably have an idea that you are in mortgage stress, but even if you are managing to make your repayments, you could still technically be in mortgage stress.

Mortgage stress is a big issue in Australia right now because:

• Home loan interest rates are rising fast off the back of Reserve Bank cash rate decisions.
• Cost of living is increasing as inflation rises.
• Wage growth remains lower than inflation.

This all means that the average Australian's home loan costs are soaring at the same time as prices for food, energy and fuel are rising. This is pushing more people into mortgage stress.

What is mortgage stress?

Mortgage stress is typically defined as when a homeowner is using more than 30% of their income to cover mortgage repayments.

According to Finder's Consumer Sentiment Tracker (CST), 29% of Australians said they struggle to pay their home loan or rent.

You can be in mortgage stress even while you're still able to make repayments. But it means that the cost of meeting your repayments is becoming a serious burden.

In fact, 33% of Australians in the CST said they found paying their mortgage or rent stressful.

If you're facing mortgage stress you may be able to re-assess your spending and make some cuts. If things get very difficult you can also get hardship support from your lender.

What causes mortgage stress?

While the accepted definition is generally that spending 30% of your income on your mortgage puts you in stress, there are other factors that could be having an effect. Often it can be something out of a borrower's control, like the loss of a job or rising interest rates.

You may only be spending 20% of your income on your mortgage, but your other expenses may mean that you are still in financial stress. For instance, a single parent earning $60,000 paying for groceries for 3 children, plus all the additional energy costs, will be more stressed than a couple with a household income of $140,000 paying a larger proportion.

Mortgage stress can be caused by circumstances of your job, relationships, living arrangements, expenses and the economy. The last 2 years of the coronavirus pandemic have also hit a lot of households hard, which could be a contributing factor to many people's financial stress. There has also been increasing household debt and low wage growth.

Am I in mortgage stress?

The 30% benchmark is not necessarily the way to judge whether you are in mortgage stress. If you are a household with a lower income, it might be that paying less than 30% is still putting you in stress, maybe without even realising it.

Do any of the following statements apply to you?

• I live pay cheque to pay cheque and struggle to pay my bills and mortgage on time.
• I've recently lost my job.
• I've had to borrow money from parents and friends or had to take out a personal loan to cover ordinary expenses.
• My mortgage has interest-only repayments and I don't have much equity in the property.
• Financial stress is affecting my health and personal relationships.

If this sounds like you, you're likely facing mortgage stress.

How can I manage mortgage stress?

There are steps you can take to make your mortgage more manageable. It starts with sitting down with your financial records and getting organised.

Here are some steps you can take:

• Take a thorough look at your monthly spending over time. Are there any obvious expenses you can cut out, like Uber Eats, dinner out, Netflix subscriptions or a gym membership you hardly use?
• Once you've analysed your spending, make a budget and stick to it.
• Can you find other sources of income? It might sound obvious but increasing your income will reduce mortgage stress. Could you get weekend work through Airtasker or Uber? Perhaps you could rent or use some of the space in your property in a variety of ways. Have you asked your boss for a raise? Seriously, it might be worth a try.
• Can you sell anything? Consider downgrading your car or selling valuable items that you might not need.
• Move your mortgage to interest-only repayments. This will lower your repayments significantly in the short term (see more on this topic below).
• Refinance your mortgage. If you've just been managing to make repayments (and those repayments are principal and interest repayments), you should be able to refinance your mortgage to one with a lower interest rate. This can actually save you a couple of hundred dollars a month or more in some cases.
• Downsize by selling and buying a cheaper home. This does take time and money itself, though, and you should factor in those costs and weigh up if it's worth it or not.

As hard as it might be, it's important to keep making repayments on your mortgage. Future lenders will be reluctant to extend credit to you if you're not able to maintain payments on your first loan.

Hardship assistance and repayment holidays

Your lender might be able to help you if you're struggling to make repayments. Just keep in mind that sometimes it's better to tell your lender as little as possible until you absolutely need help.

It is in your lender's best interest to help you, and here are 2 ways your lender might be able to do so:

• Hardship assistance schemes. Most lenders have hardship assistance schemes and can offer advice to help you get your finances under control.
• Repayment holidays. Some lenders will let you pause your repayments for a short "holiday" to help you get back on your feet financially.

How can I avoid mortgage stress before it happens?

Maybe you're not in mortgage stress yet, but if you're starting to feel the weight of your mortgage repayments or are looking to buy a home and are worried about mortgage stress, there are steps you can take ahead of time.

For current homeowners, follow the steps mentioned above: look at your spending, cut costs, set a budget and consider refinancing if you can get a lower rate. Try to make extra repayments now (if you are able to) to build up a savings buffer.

For hopeful homebuyers, the following are some of the most important steps you can take in advance to avoid mortgage stress:

• Work out how much you can realistically afford to make in mortgage repayments. Look at your current expenses and then add mortgage repayments on top. If you're currently paying rent, be sure to work out how much more expensive a mortgage would be. Use our borrowing power calculator to help you plan carefully.
• Buy a property you can afford. Once you know what you can afford, stick to it – don't go over that budget. If you can't get what you want then consider a cheaper suburb, a humbler property type or even consider buying in a cheaper city.
• Start an emergency fund that can cover a few months of expenses if you find yourself unemployed.
• Consider income protection insurance. This form of insurance provides a temporary income when you're unable to work due to illness or injury.

Counselling and support

Mortgage stress is more than financial. It can take its toll on your relationships and your mental and physical health.

Remember that there is always help available, for financial and emotional distress.

• National Debt Help Hotline: 1800 007 007
• The Department of Human Services: Crisis and special help
• Lifeline: 13 11 14

More helpful guides on Finder

• How to deal with missed mortgage repayments
• Money tips to help you save