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As the cost of living in Australia continues to rise, more people are finding themselves suffering from mortgage stress. But what does that actually mean?
Mortgage stress has been a hot topic of late, with a January 2019 report by Digital Finance Analytics finding that 31% of owner-occupied households suffered from it.
And so we spoke to head of lending operations at Bank First, John Spiteri, to find out what mortgage stress means and how we can avoid it.
Mortgage stress, or housing stress, can be caused when a person’s income is disproportionate to their loan amount. Picture: Getty
What is mortgage stress?
Mortgage stress is the feeling people experience when their monthly repayments are so high that they struggle to pay the bills. While there’s no official threshold, the consensus is that people begin to suffer from mortgage stress when their mortgage repayments exceed 30% of their household income.
“[It’s] when people get into financial pressure, generally because they either take on a higher commitment than they should have, or the forces of nature move against them and interest rates go up, or someone loses a job or falls ill,” says Spiteri.
How does it happen?
Generally, mortgage stress happens when a borrower stretches their financial muscles and the pressure of an unexpected monetary setback causes them to snap.
For example, a borrower might increase their spending and become accustomed to a certain lifestyle, only to realise later that they can’t keep up. Or their income may take a hit, pushing their monthly repayments over the 30% mortgage stress threshold.
“Sometimes people think they’ll be alright, [that] they just need to cut back on a bit of this or a bit of that. But what they find after a while is that they get a bit complacent in their lifestyle, or they find that they’ve had to cut back on things they enjoyed before, creating a kind of frustration or stress,” he said.
‘Australians also haven’t had a pay rise for a few years now but the cost of living has continued to increase. People are also starting to talk about interest rates going up again sometime in the future, which is probably going to cause a problem as well if they’re already finding things a bit difficult.”
A budgeting tool can help you keep track of your outgoing spending. Picture: Getty
Take our mortgage stress test
As we mentioned earlier, there’s no official definition for mortgage stress. But if you answer yes to the majority of these questions, that’s a fairly good indication that you’re suffering under the weight of it.
- Are you struggling to pay your utility bills?
- Does more than 30% of your pre-tax salary go towards your home loan?
- Are you expecting a baby and worried about how you will cover the costs of raising a child? Or are you planning to get married and equally worried about how you will fund the wedding?
- Are you worried about how you will pay for your new car or other large purchases?
- Are you struggling to pay off your credit card?
How can I avoid mortgage stress?
The best way to avoid mortgage stress is to buy a home that’s well within your budget, so that you can build up enough savings to see you through an unexpected financial emergency.
Responsible lending guidelines mean that banks should help you do this, but Spiteri says you need to do your part, too, by providing an honest and detailed appraisal of your living expenses.
“People often think they spend a certain amount per month, but really they spend that amount plus 50 per cent,” he says.
“If you underestimate your expenses when telling the bank what you spend on living at the moment, and they calculate how much you can borrow based on that amount, then you’re putting yourself on the back foot from day one.”
You can also use our borrowing power to minimise the risk of overextending yourself, and follow the tips below, too.
