How to avoid mortgage stress

Mortgage stress happens when more than 30% of gross household income goes to repayments. Typically, this means spending a disproportionate amount of income paying off a home loan at the expense of other necessities or financial goals.

Despite the relatively stringent requirements in place nowadays for borrowing a mortgage, there are still several scenarios where you could end up in mortgage stress. If that happens, you need to manage it as best as possible.

Yet, as the old medical adage goes, prevention is better than a cure. So, taking steps to prevent mortgage stress from occurring in the first place is a good thing.

Stress-test your budget before applying for a home loan

Before applying for pre-approval, use a mortgage repayment calculator to estimate potential monthly mortgage costs based on how much you can actually afford. Then, do a mortgage stress test to see how well you could manage repayments under different scenarios, such as a rise in interest rates or a change in income.

» MORE: How to calculate mortgage repayments

Don’t borrow over your head

Just because your lender offers you a certain amount doesn’t mean you should take it. You may have found the home of your dreams, but it’s always better to err on the side of caution when borrowing hundreds of thousands of dollars for the first time. Your mortgage stress test results should help guide you in the right direction when you’re ready to get a home loan.

» MORE: How much do you need for a house deposit on a home loan?

Talk to a financial planner or mortgage broker

It doesn’t cost anything to talk to a mortgage broker or financial planner who can help you navigate many first-time home buyer considerations, including what is a safe amount to borrow given your income, savings, debts and all-around financial circumstances.

» MORE: Should you buy or rent?

Negotiate the best possible rate at the outset

The lower the interest rate and the cheaper the fees at the outset of your mortgage, the less you have to pay and the more you could have in reserve for a crisis. Once again, it may be beneficial to use a mortgage broker who deals with various lenders to secure the best possible deal.

» MORE: How to find a mortgage broker

Understand your fixed loan

Many mortgagees on lower fixed loans are shocked by the steep jump in their repayments once the honeymoon period ends after the first few years of their mortgage. This shock is especially true if they had locked in a historically low rate for their fixed loan and were unprepared for a monthly rate change of possibly a few percentage points. It is essential, therefore, to plan for such an eventuality and put enough aside to service the new loan amount.

» MORE: What’s the difference between fixed and variable rate loans?

Take out health and income protection insurance

Losing your primary source of income through injury or permanent disability or facing unforeseen medical expenses could strain your finances and make it difficult, if not impossible, to repay your mortgage. Having insurance that protects your income will at least mitigate those circumstances should they eventuate.

» MORE: What is lenders mortgage insurance?

Plan for potential problems

That may seem easier said than done, but if you can see trouble ahead, you should plan now because when a crisis hits, it’s too late to do anything about it. The last thing you want is to fall behind on your repayments. So, putting money aside for that possibility in an emergency fund is a very good strategy.

» MORE: How long will it take to pay off my mortgage?

Shop around for better deals on monthly bills

Budgeting is another vital factor in staying on top of your mortgage. Shop around for better deals on your electricity and groceries to save as much as possible in case you need it in a crisis.

» MORE: How to lower your monthly bills

Supplement your income

Extra cash may be a powerful buffer between managing your mortgage and future stress. Explore ways to supplement your income, such as overtime or weekend work, starting a business or picking up a side hustle.

» MORE: 25 ways to make money online, offline and at home

Are you experiencing mortgage stress?

If you are in mortgage stress or feel overwhelmed by debt and financial stress, you have options:

Talk to Lifeline on 13 11 14, or Beyond Blue on 1300 224 636 about your situation.
Call the National Debt Line at 1800 007 007 to learn about options, including financial counselling services.
Contact Way Forward, a not-for-profit organisation that offers comprehensive services for financial hardship.