When mortgage stress strikes, here’s what to do about it

How to tell if you’re in mortgage stress and what to do about it (thenewdaily.com.au)

Matthew Elmas~ The New Daily~ 11 August 2023

If you’re like millions of other home owners across Australia, you’ve probably had to make room in your monthly budget for massive increases in mortgage repayments over the past year or so.

A series of RBA hikes has added more than $1000 to monthly bills for a typical $500,000, 25-year home loan since May 2022, leaving many people on the brink of mortgage stress.

And it’s about to get a whole lot worse for many, with an oft-cited fixed rate mortgage cliff now upon us, threatening to throw hundreds of thousands more people onto higher repayments.

CoreLogic research chief Eliza Owen says about 880,000 fixed rate loans will expire this year and 440,000 next year – moving people off  the COVID-19 era’s record low rates.

She said a household with a $550,000, 30-year loan could see repayments jump from $2017 a month to $3175 – a 60 per cent increase.

“Average fixed rates with terms of three years or less bottomed out at 1.95 per cent in May 2021 for owner occupiers, while average variable rates for new owner occupier borrowers are now 5.66 per cent,” Ms Owen said.

But how do you tell whether such increases in your monthly bills will land you in mortgage stress?

And what should you do if you are struggling to keep up with higher repayments?

Are you in mortgage stress?

More than a million Australians are estimated to be at risk of mortgage stress right now, according to the latest Roy Morgan figures, so if you are struggling you aren’t alone.

In technical terms, mortgage stress is defined as needing to pay more than one-third of your income in repayments – but your budget can feel strained even if the proportion is less.

Canstar finance expert Stephen Mickenbecker said mortgage stress can’t merely be defined by “rule of thumb”.

“If you don’t have enough to pay essential bills and afford the cost of living, you’re having trouble,” he said.

If you’re struggling …

If you’re struggling to meet your repayments, financial advisor and Sort Your Money founder David Rankin said there are a few things to do.

The first step should be to put a few hours aside and go through your finances to see if there are any obvious savings that you can make.

“Are you repaying more than the minimum on any loans (including your home loan) or credit cards, for example? If so, consider switching to minimum repayments with immediate effect,” he said.

“Are you salary-sacrificing into your super? If you are suffering mortgage stress, this might be money that is more valuable to you now than in your retirement.

“Are there any expensive kids’ activities – or school fees – that can be put on hold, starting this term?”

The next step is contacting your bank, Mr Rankin said, because lenders are required to provide hardship assistance when needed.

There are a range of hardship provisions available from your lender, and if the public comments from bank bosses are anything to go by, they should be able and willing to lend a hand.

That could mean a temporary pause in repayments, a restructuring of your loan, or moving to interest only payments, which will take some of the sting out of your monthly mortgage bills.

“Such an arrangement might be particularly applicable if the cause of your problems is temporary, such as a short-term health setback,” Mr Rankin said.

But Mr Rankin warned that interest-only repayments are not all upside.

“Although your repayments will be lower, you will no longer be paying down any principal, which means that the can is simply being kicked down the road,” he said.

“Your loan repayments will need to increase in the future or the term of your loan extended or both, so these increased future expenses will need to be planned for.”

Get on top of it early

Mr Mickenbecker said families concerned about escalating mortgage repayments should look into how much more they’ll be paying once the full brunt of RBA rate hikes has hit them and work out whether they’ll be able to afford those bills in addition to everyday essentials.

That way you’ll have more options, such as refinancing your loan to remove excess costs, Mr Mickenbecker said, adding that households should “do something now” if financial stress looms.

“You should be getting the lowest priced loan you possibly can,” Mr Mickenbecker said.

“For every 0.25 percentage points you save on a $500,000 loan you’re knocking about $100 a month off your repayments.

“But if you’re in genuine mortgage stress you will struggle to refinance.”