Mortgage Stress: Definition, Resolution, and 7 Tips to Avoid It

Mortgage stress is a situational condition of financial difficulties that arises for homeowners when they pay more than 30% of their total income towards mortgage repayments.

It’s a critical issue for homeowners, as it leads to financial instability and anxiety. Especially with the rising interest and property rates in Australia, about 31.4% (approximately 1.63 million) of Australian mortgage holders are at risk of mortgage stress in 2024.

That’s why the need to address mortgage stress is now needed more than ever. And we want to bring this serious matter to light today to help you understand what it is, how you can deal with it, and 7 things you can do to make sure you avoid falling under mortgage stress.

Let’s get into it.

What Is Mortgage Stress?

Mortgage stress means the situation of financial difficulties that arises for homeowners paying more than 30% of their total income towards mortgage repayments.

This is the general threshold, but it’s subject to individual conditions:

• A homeowner with a low income paying over 30% in repayments is under more mortgage stress.

• A homeowner with a high income choosing to pay over 30% in repayments may not be under mortgage stress because they may have enough disposable income to meet their basic needs.

It ultimately comes down to financial difficulties. You’re only under mortgage stress if paying over the threshold puts you in a financial struggle.

At nearly 32%, we’re witnessing the highest number of Australian mortgage holders at risk of mortgage stress since the global financial crisis in 2008. The record high was 35.6% in mid-2008.

It’s even more concerning that 19.7% (about 987,000) of all Australian mortgage holders are considered ‘extremely at risk’ of mortgage stress, which is well above the average of 14.3% recorded over the last 10 years.

Causes of Mortgage Stress in Australia

With these many people at risk and great financial and mental damage inflicted upon them, we’re left with the question of what causes it. 

Here are all the factors that push Australian homeowners into mortgage stress:

• Rising interest rates.

• Rising property rates.

• High property prices in major cities like Sydney and Melbourne.

• Insufficient financial planning or unexpected life events like job loss and medical emergencies.

• Borrowing more than what homeowners can afford.

• High debt-to-income ratio.

Signs You’re in Mortgage Stress

If you own a mortgage, it’s good to be aware of the signs of being in mortgage stress. Because the sooner you’re able to deal with your current situation, the better you will be financially and mentally in your life.

Here’s a list of the 7 signs of mortgage stress. Seek immediate help if you find yourself in one or more of these situations:

• Your mortgage repayments are over 30% of your total income, which has put you in a financial struggle.

• You’ve failed to repay one or more of your repayments.

• You’re relying on family or friends to help you financially to pay your bills.

• You’re living paycheck to paycheck.

• You’re not able to save or budget for unexpected expenses like vehicle repair or medical emergencies.

• You’re unable to afford luxuries like dining out or going on holidays.

• You’re using money from your savings for repayments or other household expenses.

Experiencing any one or more of these signs means you’re in mortgage stress. Go through the resolution steps in this guide to deal with your situation the ideal way.

7 Tips to Avoid Mortgage Stress

Before we move to how you can deal with mortgage stress, let’s look at everything you can do in your power to avoid it in the first place.

If you’re planning to get a new mortgage or already have one but you’re not yet experiencing any of the mortgage stress signs above, these 7 tips will do you a great favour.

The only way to avoid mortgage stress is to make sure you have a solid financial standing where you can comfortably afford your mortgage, basic living expenses, and all other liabilities without having to struggle every month. 

Ultimately, it all comes down to managing your current total income effectively, allowing you to live within your means while steering clear of mortgage stress.

1. Borrow what you can afford: Ensure the loan amount you’re taking has repayments that add up to only 10–20% of your total income. Even though the threshold is 30%, it’s good to always have a little bit of wiggle room for your finances.

2. Budget beyond the basics: Rising interest rates and unexpected expenses will influence your repayments. Take them into account when calculating affordability.

3. Perform occasional home loan health checks: Your income may fluctuate, new expenses may arise, or your interest rate could have gone up since you first took out the loan. A home loan health check every year will help you identify these changes and help you budget accordingly.

4. Know your financial limits: Dining out, going on a holiday, or even that designer bag you saw might seem worth buying. But don’t, especially if your finances are tight.

5. Cut down on expenses and debts: It’s a life hack to only spend money on your basic living expenses and cut down on any debts that take away much of your income. This brings down your liabilities and gives you more to save or repay more of your mortgage.

6. Prioritise an emergency fund: It’s always a good idea to prepare for some downtime. Gradually build savings to cover at least 3-6 months of mortgage repayments, so you’re not weighed down with liabilities even in the worst-case scenario of losing your job.

7. Seek professional advice: Work with a mortgage broker or financial planner to choose the right loan for your needs.

Koalify is your certified mortgage broker that actively works with the top 30+ lenders in Australia. We strive to find and bring you the right offers from the right lenders without any commission or brokerage fees.

Want a mortgage that fits your needs? Contact us today with your requirements, and we’ll curate the most suitable offers without costing you a single dime!

What to Do if You’re Experiencing Mortgage Stress

So, what if the worst-case scenario happens to you? What if, unfortunately, you are in mortgage stress?

Falling under mortgage stress costs a lot, both financially and mentally. That’s why it’s extremely important to take the right measures to deal with it as soon as you see the signs we mentioned in this guide.

Here are 8 things you should do immediately to deal with it the right way.

Request for a Hardship Variation

First and foremost, reach out to your lender to request a hardship variation the moment you realise you’re in mortgage stress.

It’s a temporary modification of the loan agreement made to assist borrowers who are in financial difficulties. You could get repayment holidays, an extension of the loan term, or similar restructured terms of the loan with a hardship variation.

Under the National Credit Code, you can request a hardship variation if you have a reasonable cause, like a medical emergency or job loss.

And if your lender refuses your request, you can file a complaint at the Australian Financial Complaints Authority (AFCA) to review the decision if you are within reason.

Generate Additional Income

If your lender refused your request for a hardship variation, start exploring options for generating additional income.

Check with your current employer to see if you can get a raise or possibly work overtime for extra compensation. 

If that’s not an option, you can find a part-time job along with your full-time job to generate a bigger cash flow.

Reassess Your Budget

Reassess your budget and identify areas to cut back on. Find out what made your financial standing weak for you to be in mortgage stress.

Unless you can generate a bigger income, you should be able to figure out ways to bring your expenses down. The best way to do it is by only spending on basic necessities and getting better deals on utilities like electricity, gas, phone, and internet.

Repay Using Another Method

If you have an offset account with sufficient balance linked to your mortgage or a redraw facility available, you can ask your lender to deduct the repayments from it.

This will buy you some to generate a higher income or pay off other debts.

Move to Interest-Only Repayments

If your monthly repayments are calculated for more than the interest, you could ask the lender to change it to interest-only repayments. 

Although this will free you up financially, you should find a way to generate a bigger income or pay off your other debts so you can soon start paying more than just the interest for your mortgage. Otherwise your overall loan balance would stay the same, so only consider this as a short-term fix.

Sell Items

Another short-term solution is to sell off any valuables you possess, like jewelry, furniture, cars, etc.

Again, this will only temporarily free up your finances, so make sure you use this time to find the longer-term solution.

Consider Refinancing

You can refinance with your current lender or a new one for lower monthly repayments or reduced interest rates.

Keep in mind that your chance of getting refinanced is low if you’re already under mortgage stress, as banks look at your affordability by reviewing your current financial standing. But you can use a refinance broker to make the most use of your chances.

Seek Financial Counselling

If you’re not able to utilise any of the above items, you should try getting financial advice from trusted organisations in Australia.

The Legal Aid WA Mortgage Hardship Service is a government-owned service that helps Australians under mortgage stress. You can avail the service by contacting their infoline at 1300 650 579.

Conclusion

Summing up, mortgage stress is a serious threat to you financially and mentally once you’re in it. That’s why it’s vital to make sure you avoid it at all costs.

If you find yourself experiencing any of the mortgage stress signs, try to resolve it immediately with the ideal steps in this guide.

And to make sure you’re able to avoid it by getting the right mortgage deal, consider getting professional advice or applying through a certified mortgage broker.

Koalify is one of the top mortgage brokers in Australia. If you want highly personalised advice for finding the right offers from the top 30+ lenders, contact us today.

We help all through the mortgage process, giving you expert guidance and dealing with most of the process ourselves on your behalf. You also don’t pay us a dime, so it’s risk-free and worth the try!

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