There appears to be an increasing amount of media commentary about mortgage stress of late.
This is mainly because of the “threat” of rising interest rates because, as I’ve written about before, rates can’t stay historically low forever.
While most smart homebuyers and investors haven’t overstretched themselves financially – and have worked with professional mortgage brokers who would advise against it – others are perhaps not quite so lucky.
What is mortgage stress?
While there isn’t really a concrete definition of what mortgage stress is, the widely accepted wisdom is that it equates to spending 30 per cent or more of your pre-tax income on your home loan repayments.
According to Digital Finance Analytics, almost one million Australian households – or 29 per cent – are currently experiencing mortgage stress.
Digital Finance Analytics has also suggested that 51,500 borrowers could be at risk of defaulting on their mortgage in the next 12 months.
While these figures do seem high, it’s likely that it relates to specific geographic regions, such as Sydney, which experienced soaring prices as well as plenty of buyers inflicted by Fear Of Missing Out over the past year or two especially.
The end result, unfortunately, is likely to be property owners with loans that can’t sustain even the smallest rate rises because they borrowed too much to start off with just to secure a slice of the “action”.
Also, with low wages growth, mortgage and household debts are at record highs.
While everyone has periods of cash flow wobbles, mortgage stress is something else entirely.
In fact, there are a number of signs that someone is experiencing mortgage stress:
- They never seem to have enough money.
- Credit card debt starts to creep up or they struggle to meet even the minimum monthly payment.
- They struggle to pay utility and other bills.
- Sometimes they miss a loan repayment by a day or two before scrapping the necessary funds together.
What can be done about mortgage stress?
If any of the signs above sound like you, there are strategies to help.
Firstly, you must have a realistic home budget from the outset that is actually within your means.
Most people have no idea how much they spend month to month and are usually horrified when they actually complete a comprehensive budget.
To help reduce mortgage stress, therefore, you must create a budget so you can recognise and eliminate unnecessary spending.
Another strategy is to call your bank or broker to discuss your options, including negotiating a lower interest rate which will reduce your repayments.
You can also request a “repayment holiday” to take some financial pressure off.
If your financial situation is particularly dire, you should also consider selling any unnecessary items – such as that new shiny car that is costing you a bomb in personal loan repayments, but is not necessary.
At the end of the day, you have to do everything you can to retain your home because once the bank moves in, it’s unlikely to be a positive experience for you, both financially and personally.
What are the top three reasons for mortgage default?
Most borrowers believe that they’ll never need to worry about defaulting on their mortgage.
But the reality is that sometimes bad stuff happens to good people.
One day you could you be gainfully employed or in a supposedly happy marriage, but by the end of the day you could have been made redundant or come home to find your husband or wife with their bags packed at the front door ready to move to Thailand.
And that changes everything.
In fact, the top three reasons for mortgage default are:
1. Divorce or separation
Divorce or relationship breakdown with a de-facto partner not only causes emotionally heartache, it’s also the number one reason for mortgage default.
2. Illness or involuntary unemployment
Anything that stops you working unexpectedly, whether it’s job loss or unexpected illness, is the next most common cause of mortgage default.
3. A death in the family
Unfortunately, the life-changing grief that comes from a death in the family is often accompanied by a significant financial burden.
This usually includes the costs of a funeral service as well as burial or cremation, and it can mean the cost of moving to a single income household if the person who passed away was a spouse or partner.
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