With all the talk about inevitable interest rate increases the last place you want to find yourself is under pressure not being able to pay your home loan repayments. In this article TRACY KEAREY, the Director of Mortgage Advice Bureau, Brisbane, explains what mortgage stress is and how to avoid it.

There are various definitions of what mortgage stress is, but it’s mostly defined as a household spending more than 30% of their pre-tax income on their home loan repayments.

So, if a borrower is spending more than 30% of their pre-tax income on their loan repayments, the underlying premise is that at these levels of debt, the average homebuyer will be struggling to repay their loan.

However, when we look at current mortgage defaults or mortgage arrears with banks and lenders it would suggest that very few Australian households are currently suffering mortgage stress.

The even better news is that due to COVID and a change in household spending habits, many borrowers are well ahead in the mortgage payments.

It’s also worth noting that over the last few years banks have been only lending money to those who could comfortably handle a 2.5% increase to the interest rate applicable  when they applied for their loan.

So, if the interest rate when applying for a loan was 2.7% the bank assessed a borrower’s income and ability to service the loan as if the interest rate was 5.2% (being 2.5% + 2.7%). To provide more wriggle room for inevitable interest rate rises this buffer rate of 2.5% was recently increased to 3%.

Therefore, unless there has been a significant decrease in the income of a borrower since making application, they should have sufficient income to accommodate future interest rate rises.

The important thing to do to avoid mortgage stress is to budget. Take the time to track your household spending so you are fully across what you spend each week and can see where you can make savings.

On this same point, each year on the anniversary of your home loan make sure that you ask your mortgage broker to scope out the market for the alternative borrowing options available to you. This will ensure that you’re never paying an interest rate that is above what you need to.

 

If you need assistance applying for a loan or would like to discuss refinancing a loan please give me a call on 0417 738 469.

Tracy Kearey is an award winning Finance and Mortgage Broker with 23 years’ experience. She has access to over 40+ lenders and offers her clients access to extensive range of loan products and services tailored to individual borrowing needs. If you need assistance with your lending needs you can send Tracy an email or give her a call on M: 0417 738 469. You might also like to connect with Tracy on Facebook

General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.

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Finance Education Mortgage Stressed – It’s Not a Place You Want to Be