Once upon a time, banks would lend would-be homeowners a sum of money based on repayments being less than 30% of the borrower’s gross income.
In the early 90s, interest rates fell and competition from non-bank lenders flourished.
This lending rule was when relaxed by home loan providers. The flexibility of loans also generally increased. Many Australians are now paying dearly for ignoring a rule – which was initially put in place to protect us.
How to identify mortgage stress
Mortgage stress means that a person is struggling to meet their loan repayments. Three different levels have been identified:
- Mild stress. People are up to date with their mortgage payments. They have some concerns about their ability to meet their commitments in the future.
- Medium stress. People are concerned about their ability to meet their commitments. They may have already missed a payment. They may also have reduced their spending, and are reliant on credit cards to meet their expenses.
- Severe stress. People are using other forms of debt to meet their mortgage repayments. They are dipping into savings or equity. They may be more than three months behind in repayments. They are looking to sell the property because they cannot cope.
How to manage mortgage stress
Mortgage stress does not necessarily mean the end of homeownership. Homeowners can take steps to rescue their personal financial situation.
There are many changes you can make to your loan to help reduce mortgage stress. Speak to your lender to negotiate amendments to your loan including:
- Extending the loan term
- Converting to interest-only repayments
- Obtaining a lower interest rate
- Accessing the equity in your home
- Restructuring or refinancing your loan
The sooner you contact your lender, the more likely they will be able to find you a solution.
Similarly, there are many measures you can take with your home to help ease mortgage stress. This can include renting out your whole home, taking in a boarder, or as a last resort, selling your home. Renting your home or taking in a boarder can provide you with a valuable source of income. This can also help to meet living costs.
Selling your home prior to repossession generally provides you with a better return. This won’t hurt your chances of borrowing again in the future.
Your personal financial situation
Finally, you can help ease the pain of mortgage stress by addressing some aspects of your personal financial situation. The most obvious thing to do is to earn more money. However, if this isn’t possible, prepare a budget to help identify potential cost savings.
Options including financial counselling, government assistance or hardship programs should also be considered. These can provide temporary relief. Whatever you do, don’t be afraid to ask for help.
This should by no means stop you from pursuing the dream of homeownership – but as they say, forewarned is forearmed.
For further financial assistance and advice, contact Insight Wealth Planning today. We can help you get back on track and minimise your stress.