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In a competitive mortgage market where interest rates were only a few years ago at historic lows, borrowers may have secured loans which, in the more recent rising rate environment are now beyond their means to repay.
With average housing prices in some capital cities nearing the $1 million mark, it’s no wonder Aussies are thinking hard about their mortgages so they don’t encounter mortgage stress (where the household uses more than 30% of their income to service their repayments1). In light of this, a new finder.com.au survey has revealed that many Australians live on the cusp of mortgage stress, with 57% of borrowers admitting that they could only handle a minimal rate rise, that is, a rise of less than $100 on top of their current monthly repayments.
To avoid having to put the majority of your income towards your mortgage repayments (and so you can live a little more comfortably), here are some tactics to help you escape mortgage stress.
Understand your borrowing capacity
First of all, it’s important to understand how much you can realistically afford to borrow for a home loan. Consider Reviewing your income, expenses, other financial commitments, potential loan details and number of dependents to get an understanding of how much you can afford to borrow.
Remember, what you can save for a deposit will play a huge part in determining the amount you can borrow. For some full-documentation loans, the loan-to-value ratio (LVR) is around 80%, which means you need to come up with the remaining 20% in the form of a down payment. Other home loan products allowing greater than 80% LVR tend to come with higher interest rates or fees.
On top of this, it’s important to fully understand the costs involved in taking out a mortgage and owning a property. Some major expenses include stamp duty, mortgage insurance (which is generally payable if you need to borrow more than 80% of your property value), establishment fees, ongoing repayments, any loan fees and repairs/maintenance.
You can use online calculators such as the IMB borrowing power calculator to get a feel for how much you can afford to borrow. Knowing your potential borrowing capacity can help to ensure that you borrow within your means, which means you’ll be in a much better position to service your ongoing mortgage repayments and the other associated expenses.
Factor in 2-3% on top of your current repayments
Once you’ve taken out your home loan, it’s important to draw up a budget and consider a buffer of at least 2-3% on top of your existing repayments to account for interest rate rises. While the cash rate is at a low of 1.5%, it’s expected to rise as early as next year1, so it’s important that variable rate mortgage holders incorporate a potential rate rise into their budgeting.
Anticipating interest rate rises and planning ahead may help you avoid mortgage stress as it could help with coping with higher interest rates and the more expensive repayments that come with this.
Rethink your existing debt
Your mortgage is arguably the biggest financial commitment you’ll make in your lifetime and it’s a debt you’ll be managing for up to 30 years. This could mean making some adjustments to your other personal finances to free up your cash flow and to reduce mortgage stress. For instance, if you have multiple credit cards, you may want to consider moving your plastic debt onto a single card via a credit card with a 0% interest balance transfer promotion. If you repay the debt during the interest-free promotional period, you’ll dramatically reduce your interest costs. However, just be mindful of the revert rate that will apply once the promotional period ends.
Consider refinancing your mortgage
If you don’t think you’re getting the best bang for your buck on your mortgage, then think about switching. Refinancing to a lender that offers an interest rate that’s even 0.25% lower than what you’re currently paying could mean thousands of dollars in savings over the life of your mortgage. However, an interest rate is not everything in a home loan and it’s important to be mindful of the establishment costs and ongoing fees associated with a new home loan.
Ask your bank for assistance
If none of the above options is possible and you’re experiencing mortgage stress, ask your bank for support. You can apply for Hardship Assistance – which may involve a temporary change to your loan obligations to give you a chance to get back on your feet financially. Your bank will assess your circumstances and if it’s appropriate, may be able to help by, for example, providing a temporary reduction or deferral of your repayments.
In Summary
Repaying a mortgage is an enormous financial commitment that can cause some households a world of stress, so to ensure it doesn’t interfere with your livelihood, consider the above tactics to remain in control of your mortgage debt. A little financial discipline can go a long way to ensure that you’re in a sound position to manage your repayments and to eventually achieve full home ownership.
Bessie Hassan | Money Expert at finder.com.au
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