Stress caused by financial problems is known as mortgage stress. Typically, if you spend 30% or more of your pre-tax income on mortgage repayments, then chances are you’re experiencing mortgage stress.
In Australia, over the past couple of decades, wage growth has been tepid but real estate prices have skyrocketed, which makes paying mortgage repayments ever more difficult. As a result, an increasing number of Australians worry about being able to afford buying a home. The latest data from Digital Finance Analytics shows that 32.8% of all Australian households are suffering from mortgage stress.
Today, the average full-time weekly salary in Australia is $1,658.70, while the median home price has reached $809,349. Therefore, real estate prices can be nearly as high as ten times the average annual income (depending on where you live), which means that owning a home is increasingly becoming a pipe dream for many Aussies.
While anyone with a mortgage is at risk, recent homebuyers who have purchased real estate in Sydney and Melbourne are especially susceptible to mortgage stress.
Avoiding Mortgage Stress
Mortgage stress is often the result of circumstances beyond one’s control:
- Rising costs of living or interest rates
- Job loss
- Natural disasters
- Pandemics and/or epidemics
- Business struggles due to a downturn in the market
Whatever the reason, there are still ways to manage mortgage stress or avoid it altogether.
Here are a few ways to help you avoid feeling overwhelmed by mortgage repayments:
- Look at market conditions: Don’t rush into buying a home. If prices are so high that you will have to pay more than you’ve set aside, then it might be best to wait awhile before you commit. Homeownership is a dream for many, but it shouldn’t come as a heavy burden for you or your family. It is preferable to wait for the conditions to improve before buying.
- Be sure that you can afford it: Make an accurate assessment of your financial situation so that you know how much you can afford to pay in loan repayments (despite what you may be told your borrowing capacity is). You have to be honest with yourself when calculating how much you can afford to pay without spending beyond your means. While it may seem obvious, many people fall in love with the idea of owning a beautiful home and neglect prioritising their financial security. Also take into account future plans. Are you planning on having children in the near future? If so, you will have to factor that into your household budget.
- Get insured: You should consider acquiring adequate insurance such as income and/or mortgage protection that will provide you with a set amount of income in case you lose the ability to work for a certain length of time. This may alleviate the stress of making repayments while you are not earning a salary.
How to Know if You Are a Mortgage Prisoner
If you are unsure whether you are experiencing mortgage stress, there is a quick and easy way of finding out. Simply go through the following questions, and if you answer “yes” to most of them then you need to start thinking about ways to overcome this painful situation.
So, here we go, are you:
- Struggling to aside at least 30% of your income to cover your mortgage repayments?
- Struggling to make repayments on time or at all?
- Able to make repayments, but have a strained cash flow which is preventing you from enjoying a decent lifestyle?
- Trying to refinance but being declined by lenders?
- Finding it difficult to pay utility bills?
- Using your credit cards to pay those bills?
- Unable to pay your credit card balance in full every month?
These are some of the most common indicators of mortgage stress.
Let’s look at options Australians have if they find themselves in mortgage prison
What If you are Experiencing Mortgage Stress?
Apart from the psychological toll that mortgage stress causes, it can also put additional strain on your personal relationships and at times even play a big role in the breakdown of the same.
The first course of action and the simplest is to try to cut on spending. While it may be challenging to scale back on some unnecessary expenses, it’s worth it if you can keep making loan repayments. Don’t eat out as often, spend less on holidays or choose a less expensive gym membership for the time being.
Get in Touch with Your Lender
If you’re having trouble making mortgage repayments, then you should get in touch with your lender and have an honest discussion with them about your financial difficulties. The sooner you talk with a lender, the better. You have no reason to feel embarrassed: sometimes things happen that we can’t control.
If the reason why you’re not able to make regular monthly repayments is due to a temporary setback, then talk with the lender about whether they will allow you to switch to interest only repayments temporarily.
Interest-only home loans require you only to make interest repayments on the loan for a certain length of time, i.e. you don’t have to pay back the principal during the interest only period.
However, this is only a short-term solution, because you end up paying back considerably more money over the span of the loan and this can also eat into the equity of your property.
You can also discuss a payment reduction plan with your lender if your income has decreased temporarily. For example, due to an injury you are unable to work for a certain amount of time.
In this case, you may be asked to suggest a repayment amount which wouldn’t be a financial burden.
The lender might be willing to give you a temporary break from repayments to help you get back on your feet.
Finally, refinancing your mortgage (if possible) might save you from mortgage stress. If you can lower your interest rate, then you’ll be paying back less.
Hardship Provisions of Major Banks
Australia’s major banks (as well as most other lenders) have relief programs designed to assist homeowners to overcome financial difficulties.
Once you inform your lender that you are worried about being able to make repayments, you may have to provide information about your income and expenses along with documents (as the case may require – e.g. a medical certificate). This additional information can help their support team to come up with the best solution to your financial problem.
The lender will assess your application based your finances, your capacity to improve your circumstances, and if you’ve previously applied for assistance. You should be notified in writing about the lender’s decision.
Clients can request a repayment holiday lasting up to 3 months. However, interest will still accumulate on the loan. You have the option to either lengthen the repayment period or increase repayment tranches once the holiday period ends.
CommBank offers customers facing financial problems the following solutions:
- Extension of home loan term
- Reduced repayments for a short period of time
- Debt restructuring
- Waivers for particular fees
In addition, customers, their spouse or dependent(s) suffering from a terminal illness or who pass away are eligible for Home Loan Compassionate Care protection. Customers will only be required to pay the minimum repayment on their loan for 12 months.
National Australia Bank
NAB has an entire team dedicated to helping customers who have fallen financially on hard times. NAB’s team works with customers to come up with an individualised payment arrangement. The bank can lower the normal repayment amount for a period of time. However, you will have to pay back the difference at a later date.
Westpac customers who are experiencing financial hardship can receive financial counselling free of charge. The customer care team will try to come up with a personalised solution that may last for a short, medium or long span of time. Possible solutions include extension of home loan term and reduced repayments.
Note that your lender must state a reason in the event that your hardship assistance request is denied. If you’re not satisfied with the lender’s response, contact their internal dispute resolution department . Be sure to keep a record of discussions you’ve had with the bank so you can keep track of all the details when you contact them again.
If even then you can’t come to an agreement, then contact the Australian Financial Complaints Authority (AFCA) to file a complaint.
Don’t Despair and Get Help
Remember that anyone can fall victim to mortgage stress. The key is to face the problem head on and take the necessary steps to solve your financial problem.
At Aviator Advisory, we have several specialist lenders that can assist clients with poor account or loan conduct, bad credit and/or adverse credit files.
If you feel like a mortgage prisoner and need someone to assist you in navigating your options, then get in touch with us.
Note: General hardship provisions may differ from those available to borrowers who have been affected specifically by COVID-19. The above offers insights into general mortgage stress and not specifically issues and/or assistance packages relating to COVID-19.
We are here to help.
Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.