Almost one million households in Australia are reeling under mortgage stress. According to figures reported by Digital Finance Analytics, Australian households experiencing mortgage distress rose by 20 percent, from 905,000 households earlier in the year to 910,000 households in October 2017. Even more alarming is the revelation that the number of severely stressed households rose by 3,000 between September and October 2017, taking the number of families battling to meet their repayments with their current income to 21,000. About 50 percent of these households comprise professionals or young and affluent families who are being forced to tighten their wallets, take on more credit, and refinance or sell their homes in the worst-case scenario. In total, almost one-third of Australian households are under mortgage stress currently.
To put the situation into perspective, the report by DFA claims almost 52,000 households risk a 30-day default in the next 12 months.
According to Martin North, DFA principal, mortgage lending is still growing at three times the growth in income, which is not sustainable. The figures show homeowners in NSW are finding it most difficult to make ends meet, with almost 250,000 households reeling under mortgage stress. Pressure has also started building in Western Australia and among affluent families.
Making ends meet
Going by the figures mentioned above, it is clear even a small rise in interest rates would cripple several families financially. Increasing mortgage stress could mean a lower standard of living – with households compromising on necessities or taking on more credit card debt, leading to further financial problems in the future.
In case you are facing financial difficulties or finding it difficult to make your mortgage repayments without compromising on basics, it is time to step back and take stock of your financial situation. Often, small changes lead to big savings. Making a practical budget and sticking to it is a good start – as it could keep you afloat despite falling in the ‘mortgage stress’ category. Even simple things such as trading that latte from your local café for a homemade brew and packing your own lunch could save you upwards of $2,000 each year. This amount can be applied towards your mortgage to save interest and shave the years off its term (calculate the difference here).
You must also compare home loans online to get the best possible rate in the market. Presently, several banks and non-bank lenders are offering competitive home loan deals and shopping around for rates online can save you a considerable amount of time and money. Compare mortgage deals from over 80 lenders across Australia here.
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Know how much to borrow
“Calculate your borrowing capacity” is common advice doled out to property buyers before they go mortgage hunting in the market. However, it is even more important to calculate the amount of debt you can service comfortably, say experts. You can use an online repayment calculator to get an idea of your monthly repayments depending on the size of the loan you intend to take.
“It can be lucrative to borrow the entire amount available to you, but it is wise to only borrow as much as you can service without compromising on basics. Smart financial planning is the only way to avoid mortgage stress,” says John, an experienced mortgage broker. “Home buyers must calculate their monthly repayments at a rate that is at least two percent higher than their current home loan rate to prepare for any unexpected rate hikes in the future,” he adds.
According to experts, no more than 28 percent of your monthly income should be applied towards your mortgage repayments. If you don’t follow this thumb rule, you might find yourself living under constant stress. If, after crunching the numbers, you think you cannot afford to buy a home in your preferred area – you can choose to rentvest, that is, buy where you can and rent where you like, or plan a budget to meet your housing goals soon.
You could always speak to a mortgage broker to understand your options better. A broker is the right person to suggest the perfect home loan product for your financial situation. With HashChing, you can find a verified broker in your local area or have your home loan queries answered by experts online, absolutely free of cost. Our mortgage brokers do all the leg work, ensuring you a get a competitive home loan deal, leaving you enough time to focus on things that matter to you.
By Vidhu Bajaj,
HashChing Content Writer