Mortgage Stress: What does it mean and what can you do about it?

If rising interest rates have left you wondering how to make ends meet, you could be in what’s known as ‘mortgage stress’. But you’re certainly not alone.

2022 has unleashed a world of pain on Australian households, with the impact of rising food and fuel costs compounded by soaring rents and mortgage repayments.

More than two in five (42 per cent) households are currently thought to be experiencing mortgage stress, with many homeowners blindsided by the RBAs decision to increase the cash rate. Having expected an interest rate reprieve until at least 2024, those who bought in a booming market, and were at their financial limits even before the increases hit, could be catastrophically impacted by this ‘perfect storm’.

What is mortgage stress?

It’s commonly understood that mortgage stress is when your household is spending more than 30% of its pre-tax income on home loan repayments. When that happens, households can sacrifice everything to keep their dream of homeownership alive. Over the longer-term, that pressure – and the choices you’re forced to make – can have huge physical, psychological and social consequences.

While the current mortgage stress epidemic has been prompted by a series of interest rate rises, at an individual level it can simply be caused by circumstances. No matter what proportion of your income is being spent on repayments, if it’s a struggle to meet your obligations because of a job loss, rising expenses, a change in your living arrangements, or anything else, the end result is the same.

How do I know if I’m in mortgage stress?

At this point in time, only a proportion of Australian homeowners have experienced the impact of the repayment hike – a significant number still remain on a low fixed-rate loan. But with the majority of those due to expire in the next two years, a brutal repayment reality-check looms.

So, just how big a hit are we talking? Well, for homeowners whose fixed loans will expire in the middle of next year, the reserve bank estimates a shocking median increase of about $650 a month in repayments. That’s a jump of 45%.

Our advice? If you can see trouble ahead, prepare now, because when crisis hits, the time for preparation is over.

If that does happen, and you end up spending more on your house repayments than you can afford, you’re officially in mortgage stress. That might mean you’re left without enough money to meet your basic needs – struggling to afford things like groceries, heating or cooling, medical needs and transport for work. The equally distressing alternative is that you are, or are on the brink of, falling into arrears on your repayments, and are at risk of losing your home.

If you’re having trouble putting food on the table or servicing your home loan, are borrowing to make ends meet, or know that you’ll be in dire straits when your fixed loan period ends, the time to take action is now.

What can I do if I’m in mortgage stress?

If you’re here, looking for help, then you’re on the right track. Our team of Financial Hardship Advocates support hundreds of Australians every week.

When you call us, we’ll ask a few simple questions to understand your particular circumstances, including the full picture of your income, expenses, repayments and any debts. From there, we’ll work with you to develop a plan of action. That might include:

• Contacting your lender’s hardship team – whose job it is to help customers struggling with their repayments – to see what they can do for you.
• Looking closely at your household expenses– areas where you could cut costs or rein in the ‘nice-to-haves’ – to develop a realistic budget. Get started with our free budget planner.
• Shopping around for better deals on utilities – electricity, gas, phone and internet. But do the whole sum, to make sure the ongoing costs stack up, beyond the ‘new customer’ incentive.
• Identifying other sources of income, such as overtime or casual work.
• Selling items you no longer need – everything from outgrown children’s toys and clothes to trading your vehicle in for something cheaper.
• Considering a very short-term move to interest-only repayments on your mortgage, while creating a more sustainable long-term plan to get back on track. Always seek advice before going down this route.

If necessary, we can also connect you with a financial counsellor or other community organisations. Most importantly, you’ll always be in control of deciding which route you want to take.