According to latest data released by Digital Finance Analytics, nearly one-third of Australian families are under mortgage stress.
But what does it mean to be under mortgage stress? In general terms, if a household’s income is not adequate to meet the ongoing expenses, including mortgage repayments, the household is considered to be under mortgage stress. According to some experts, if you are spending more than 30 percent of your pre-tax income on your home loan, you are experiencing mortgage stress.
How to overcome mortgage stress
As a home buyer, it is always recommended to plan your home loan repayments at a higher rate than what you subscribe for, to be prepared for any interest rate hikes in the future. Even lenders stress-test your ability to repay a home loan by calculating your home loan serviceability at a rate that is almost three percent higher than the current home loan rates.
Yet, borrowers tend to fall behind their mortgage payments if they do not plan their repayments well. Besides, any change in financial circumstances, such as an illness, loss of job, a divorce, or the birth of a child could impact your ability to service your home loan.
In case you are finding it hard to meet your mortgage repayments without stretching your finances, don’t fret. With some smart planning, it is possible to overcome mortgage stress and get your finances back on track.
If you are wondering how to overcome mortgage stress, here are a few simple and effective tips:
Redraw your budget – It is possible that your financial circumstances have changed since the time you signed the dotted line on your home loan application. It is, therefore, a good idea to redraw your budget, taking a fresh stock of all your incomings and outgoings. By doing so, you would get a clear idea of where you are spending money and where you can cut down. Small changes such as carrying home-cooked meals to work instead of buying lunch or cutting down on alcohol, not only improve your health but significantly add to your wallet as well.
If you are having difficulty managing your finances, open this budget calculator and plan your finances now to get control of your future.
Negotiate with your lender – Instead of borrowing money from friends and relatives to get by each month, it is better to call up your lender and negotiate a lower rate. If you have maintained a good repayment history, your bank might offer you a lower rate to keep from losing a customer.
However, if you are facing serious difficulties, it is best to be upfront about your situation and ask your lender for hardship assistance. It is possible to request the credit provider to rearrange the financial terms of your home loan, give you a repayment holiday, allow interest only repayments or even defer payments for few months. Learn more about financial hardship assistance here.
Refinance to a lower rate – Another way to effectively reduce your monthly repayments is by refinancing to a lower rate mortgage. It is possible to find home loan deals as low as 3.56 percent pa (variable) currently. You can use this repayment calculator to see the significant difference a reduction of one percent in your home loan can make to your wallet.
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How to avoid mortgage stress?
According to Ashley, a mortgage broker, one of the best ways to avoid mortgage stress is by getting ahead of your mortgage while you still can. Here are three ways to avoid mortgage stress in your life:
Buy a home you can afford – Often, your borrowing capacity is more than what you can afford to service, as lenders are not aware of your personal circumstances. Thus, it is prudent to borrow what you can afford instead of going for the full amount available to avoid financial stress in the future. You can calculate your borrowing capacity here and use this repayment calculator to figure the size of the loan you can comfortably service.
Get income protection – An income protection plan is recommended for every adult, especially self-employed people and small business owners. An income protection plan replaces your income in case of injury or sickness, helping you meet your expenditure seamlessly during the period. Read more about income protection plans on the ASIC website, here.
Plan to pay your home loan sooner – There are simple ways to get ahead of your mortgage at the outset, so that you have a cushion in times of emergencies. The following tips will reduce your principle, bringing down your repayment amount gradually, saving you time as well as interest on your home loan:
- Make your first repayment on the settlement date instead of waiting for a month when it falls due.
- Apply any lump sums – if your loan deal allows such as your annual bonus, tax refund, gift money, proceeds from a garage sale, loose change collected over the year – towards your mortgage to pay it off quicker. This lump sum calculator would help you crunch the numbers.
- Pay fortnightly instead of monthly. There are 26 fortnights in a year – meaning 13 full repayments in a year instead of 12 monthly repayments.
You can read more about paying off your mortgage quickly, here.
Get the right home loan features – Experts agree that the best way to save money on your home loan is by getting the right home loan in the first place. Apart from the interest rates, home buyers must also consider the extras in their home loan. For example, an offset account can save you a lot of money over the term of the loan. With an offset account, you pay interest only on the balance of your outstanding home loan minus the amount in your offset account. So, if you owe $300,000 on your mortgage and have $50,000 in your offset account, your interest is only calculated on the remaining $250,000, translating into huge savings for your pocket. Besides, you can also ask for free additional repayments and redraws to maintain financial flexibility in your mortgage. Learn more about the essential features you need in your home loan.
With HashChing, you can compare hundreds of broker pre-negotiated home loan deals to save more money on your mortgage. You could also post your home loan queries online, without sharing any personal information, and have them answered by expert mortgage brokers in a transparent manner. Don’t worry; your information is safe with us. We promise you won’t receive any unwanted calls or emails.
By Vidhu Bajaj,
HashChing Content Writer