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A mortgage can often be the biggest expense within a household budget, taking the largest chunk out of a household income. With the rising cost of living, from fuel costs to the price of a coffee, the stress of paying off a mortgage can become an unwanted headache.

Falling into mortgage stress can not only have financial consequences, but can contribute to poor mental health and affect your daily life. Let’s take a look at what mortgage stress is, the causes and signs, what to do if you’re experiencing it and how to avoid it.

What is mortgage stress?

Mortgage stress is when a household finds it difficult to pay their bills, and cover their mortgage repayments at the same time. This stress arises when the ratio of income to loan repayments and expenses is changed.

While there is no truly accurate way to measure mortgage stress, a generalised measurement of this financial anxiety is when a household with relatively low income spends 30% or more of its pre-tax income on home loan repayments. Whether or not someone is experiencing mortgage stress might depend on personal circumstances, household spending, and other variables related to personal finances.

If you’re feeling anxious about paying off your home loan, you’re definitely not alone. Recent stats from Digital Finance Analytics show that a total of 1.2 million Australian households were in mortgage stress in May 2022. That’s around 38% of households!

And, with rising interest rates, it’s reasonable to assume that even more households are experiencing mortgage stress.

What causes mortgage stress?

Mortgage stress is caused by a change in ratio of income to mortgage repayments and bills. While it is commonly defined as spending more than 30% of your pre-tax income on your home loan repayments, mortgage stress is not a measurable feeling and can be felt by anyone.

If you’re finding it tough to pay your mortgage repayments and bill obligations each month, then you might have fallen into mortgage stress.

Signs of mortgage stress

Typically, mortgage stress is the first step before mortgage arrears or default, when a homeowner has missed a repayment or a series of repayments. If you are almost at the point of defaulting one of your repayments, you are most likely experiencing mortgage stress.

A home loan is quite a big financial obligation, so if you’re finding it difficult to make your repayments, you may be in mortgage stress.

A great way to work out whether you are in mortgage stress is through simple calculation. The Australian Housing and Urban Research Institute (AHURI) states that working out your mortgage stress based upon the 30% mortgage-to-income ratio is not truly accurate, due to the fact that it does not take into account all income levels and benefits. However, calculating your current financial situation using this ratio is a good way to view your current expenses and how your mortgage repayments find into your budget.

Mortgage stress calculator

Calculating whether you’re in mortgage stress can be done through looking at the 30% mortgage-to-income ratio. If your gross income, when separated to pay expenses, is putting 30% or more into mortgage repayments, then mortgage stress may be your current financial situation.

For example, let’s say your gross income is $70,000 and your mortgage repayments are $3000 each month. If your annual home loan costs are $36,000, and 30% of $70,000 is $21,000, then you are well over the 30% mortgage-to-income ratio. This means you are most likely experiencing mortgage stress.

As AHURI says, this calculation does not apply to all households as it does not take into account all income-levels or benefits of large mortgage repayments.

At Homestar Finance, we also understand that everyone’s circumstances are different. Seek professional advice by getting in touch with one of our loan specialists, or use a mortgage stress calculator to help you work out your own financial situation.

How to avoid mortgage stress

There are a number of things you can do to avoid or manage mortgage stress:

Think ahead

The best way to avoid mortgage stress is by thinking ahead. Being realistic about what you can and cannot afford when choosing a home is a great way to ensure your home loan can be easily repaid. Take into consideration whether you have enough money to take on a loan, and an emergency fund already in place in case of financial difficulty.

Look into your home loan repayments

Assessing your home loan every few years will give you an idea about whether your current mortgage is right for you. Look to refinancing or changing lenders if your home loan capabilities have changed, or there is opportunity to take advantage of a lower home loan interest rate.

Assess your household budget

Making sure to check up on your budget and re-allocate spending when needed. Of course, your financial circumstances will change frequently with extra money often spent on holidays or education, or put into an emergency fund. Re-allocating money in your budget is a great way to keep your expenses and mortgage in check.

Use an offset account

Choosing an off-set account for your home loan repayments is a great way to track your spending and ensure your home loan payments are always paid.

What is an off-set account? An off-set account connects directly to your home loan. You can deposit your salary or savings straight into this account and then the balance will immediately offset the amount owing on your home loan. This will help you keep track of funds available to ensure your mortgage can be paid. Use our home loan offset calculator to see whether you could benefit from an offset account.

Manage your household income and cut down on costs

Cutting down on your expenses is easier said than done, but making sure to go through all of your costs with a fine-tooth comb may be extremely helpful for those at risk of mortgage stress. Whatever discretionary household purchases that you can cut down on can improve your mortgage-to-income ratio and reduce the risk of mortgage stress.

Researching the best deals for electricity, water, gas, phone and internet is a great way to cut down on expenses and allow for your household income to be spent more efficiently. Getting rid of unused memberships, streaming services and clothing purchases are also great ways to reduce spending.

Cut down your debts

Cutting down on your debts is another great way to reduce mortgage stress. Cancelling your credit card, or even just reducing your spending limit, will decrease temptation to overspend. And of course, reducing buy now, pay later services is always a great way to ensure all your expenses are tracked and up to date.

What to do if you are already in mortgage stress

If you are already in mortgage stress, a great option is to talk to a financial adviser or counsellor about your current situation. Take advantage of free financial counselling services that are available across the country, such as the National Debt Helpline on 1800 007 007 or the Financial Counselling Australia website that has a ‘find a financial advisor’ map.

The first step toward reducing mortgage stress or re-configuring your financials is to speak to your lender. At Homestar Finance, we have dedicated loan specialists that provide helpful insight into how you can change or improve your financial situation, especially in the instance of mortgage stress.

There are several options your loan specialist may suggest to make your home loan repayments more manageable, such as:

  • Reducing repayments to the minimum: it could be possible to reduce your repayment amount or even change the frequency of your payments.
  • Access excess funds: you may be able to access excess funds that you might have in your off-set account. However, make sure to check the conditions of your loans first.
  • Swap to interest only repayments: this option is a great way to reduce repayment costs for a temporary period of time.
  • Restructure your loan: restructuring your loan, such as moving from a variable rate to a fixed rate is a way to create certainty as to what your repayment will be each month, is a great way to improve your financial stress.

For all of these options, make sure to speak to one of our loan specialists for professional advice when considering the change in fees or conditions of your home loan contract.

Mortgage stress in Australia: Where is it worst?

The reason for rising numbers in Australian households falling into mortgage stress is economic turbulence. Where is mortgage stress worst in Australia?

Both low-income and affluent suburbs in Victoria, NSW and Queensland are feeling the most financial stress when it comes to paying off their home loan. With interest rates rising and property value decreasing in these states, it’s no wonder that mortgage stress is at an all time high. The potential increase in mental health problems due to household financial difficulties, as well as the strain on the economy is undoubtedly a worry for many Australians.

Why are mortgage stress rates rising in Australia?

From recent studies at Digital Finance Analytics, there many influences as to why mortgage stress rates are rising so much, and why households are feeling financial strain:

  • The COVID-19 pandemic (of course) has put tension on household finances
  • High property prices means that borrowers are taking out larger mortgages
  • There is currently a stagnant wage growth
  • The cost of living is rising dramatically
  • Home loan interest rates are also rising 
  • Property value is in a decline

Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.  

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    Understanding more about mortgage stress

    Is mortgage stress calculated on gross or net income?

    Mortgage stress is calculated on gross income, and is done through viewing your financials by the 30% mortgage-to-income ratio. While not necessarily applicable to all financial circumstances, this ratio allows for many to understand whether they are at risk of home loan difficulties and how to prevent mortgage stress.

    Does mortgage stress only impact low income earners?

    No, mortgage stress can affect anyone regardless of their income level. While low-income borrowers may be at higher risk of financial difficulties, mortgage stress can happen to any individual that has a home loan.

    Increased risk of falling into mortgage stress can come from other factors too, such as unpaid debts or high expenses in other areas of life.

    How does mortgage stress impact borrowers?

    Mortgage stress can have many negative ramifications across all areas of life, not just financial situations. It can impact borrowers in the following ways:

    • Financial consequences: if you are in mortgage stress you may reach a point where you are unable to make your repayments. This means you are in mortgage arrears or default, and might have financial consequences such as extra fees, or default on your home loan altogether.
    • Mental and physical health problems: of course, stress can lead to mental and physical health problems such as migraines, muscle tension and sleeping problems. However, more significant health problems such as heart disease or anxiety disorders may arise from financial stress.
    • Impact on your personal life: stress can have an impact on personal and social relationships and the disruption of social plans. If you share your financing with a partner, it may take a toll on your relationship to have this kind of stress.
    • Poor decision making: sometimes those at risk of mortgage arrears or default can make poor decisions when under this amount of pressure. For example, taking out high-interest loans or rushing to make investments without conducting proper research beforehand are consequences of poor decision making.

    What is the average mortgage in Australia?

    The Australian Bureau of Statistics (ABS) has shown that the average mortgage size for owner-occupied homes was $589,141 in August 2022.

    While the amount of borrowers has decreased in recent months as home loan interest rates have risen, the average national loan size is still up by 41% over the past five years.

    What percentage of salary should go into a mortgage in Australia?

    Surprisingly, the percentage of salary that should go toward your mortgage is quite close to the 30% that can indicate mortgage stress. At a maximum, you should be spending 28% of your income on your home loan.