What is mortgage stress?

Mortgage stress definition

Mortgage stress is the financial burden experienced by homeowners who spend a disproportionate amount of income paying off a home loan. Generally, it’s thought that mortgage stress kicks in when more than 30% of a household’s pre-tax income goes to its mortgage.

Mortgage stress places borrowers under undue financial pressure, often to the point where they cannot meet their monthly mortgage repayments or cover other household needs.

To understand whether you are experiencing mortgage stress, do a mortgage stress test or use a calculator to determine the percentage of your income that goes towards your mortgage. For example, if your pre-tax monthly income is $7,000 and you pay more than $2,100 on your mortgage each month, that’s 30% — which means you could be under mortgage stress.

» MORE: How to calculate your mortgage repayments

What causes mortgage stress?

Current levels of mortgage stress are largely the result of ongoing economic uncertainty due to the double whammy of inflation and rising interest rates bumping up monthly repayments.

Inflation is currently at 4.10%[1] after being lower than 1% during the pandemic. This high rate drives up the cost of goods and services, including everything from groceries to electricity and petrol. That means households have much less disposable income on top of higher monthly mortgage repayments.

Each mortgagee will have a different interpretation of mortgage stress. However, it will usually feel like they are sputtering into the pitstop of payday with very little left in their financial tank for even the bare necessities.

Individually, there could be any number of added reasons for mortgage stress apart from interest rate rises. These reasons could include job loss or loss of hours or major unexpected bills, such as medical expenses, car repairs, and urgent house repairs or maintenance, such as a leaking roof. Many homeowners don’t have the means to budget for such an eventuality. Making regular mortgage repayments may seem overwhelming in these cases because they simply take up an unmanageable percentage of your income.

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

How common is mortgage stress in Australia?

Mortgage stress is increasingly common in Australia.

An estimated 1.63 million (31.4%) mortgage holders are at risk of mortgage stress, according to new research from Roy Morgan[2]. This period follows the interest rate increase that took rates to 4.35% in November 2023. In September 2023, when rates sat at 4.1%, the number of Australians at risk of mortgage stress was 1.57 million (30.2%)[3].

At nearly 32%, this is the highest number of Australian households at risk of mortgage stress since May 2008 — before the global financial crisis. The number at risk has risen by 822,000 Australians since May 2022, when the RBA began hiking interest rates.

The number of Australians considered ‘extremely at risk’ is now at 987,000, or 19.7% of all mortgage holders, well above the long-term average of 14.3% over the past 10 years.

Will things continue to escalate?

Many new homeowners may have enjoyed a lower fixed interest rate for a ‘honeymoon period’ of up to five years at the start of their mortgage. As those mortgages move back to a standard variable rate, those homeowners may be overwhelmed by the jump in monthly repayments. In 2023, up to 880,000 households were due to come off fixed loans. To meet their new mortgage commitments, they would need to find hundreds or even thousands of dollars more each month, according to an article in the Australian Financial Review in April.

This escalation is due in part, the Australian Financial Review adds, to the RBA’s attempt to prop up the economy at the height of the Covid pandemic by providing banks with very cheap three-year fixed-rate credit, which they then passed on to borrowers in the form of once-in-a-generation cheap fixed-rate loans. Once insulated from the RBA’s rate rises, these mortgagees now face a shocking reality check. As that happens, it has undoubtedly contributed to some of the 1.63 million mortgagees currently experiencing mortgage stress — a number bound that rose rise further before the end of 2023.

Who is under the most stress?

It could be inferred that those in the lowest socio-economic areas are affected the most, but that is not necessarily the case. Mortgage stress tends not to discriminate, and anyone can fall victim. Those in more affluent neighbourhoods with higher mortgages are certainly not immune.

An article from News.com.au found that homeowners in South Melbourne were among the most affected in the country. In that affluent suburb, 4.93% of mortgagees were at least one month behind in repayments, placing it in line with much poorer areas. The article, citing data from Standard and Poor’s, also found that five of Australia’s top 10 suburbs for mortgage stress were in NSW, three in Victoria, and one each in Queensland and WA. That strongly infers that mortgage stress is an across-the-board issue.

» MORE: How to avoid mortgage stress

How to manage mortgage stress

Any type of financial stress can be extremely troubling. This is especially true if you have dependents who rely on you to be able to provide for them. The impact of mortgage stress, if not managed, can be disastrous. As with medical conditions, prevention is always better than a cure. Therefore, you must take any measures available to thwart it from occurring in the first place.

Financial circumstances are often out of people’s control. Once you are in mortgage stress, you can take several steps to avoid a worst-case scenario, such as losing your property.

First, talk to your lender about your changed situation and see if you can make a mutually acceptable arrangement. That may involve refinancing, where you have greater leeway to repay the loan, possibly for a reduced amount for a set time. Remember, your lender should do everything they can to help you avoid selling your property, so they should show you some leniency at the very least.

You may be forced to sell your property if you cannot service your loan over some time and have no other means of accessing cash. You can do it voluntarily, giving you some control over the process. Or, you can sell it through what could be a painful legal process. It’s also sobering to know that, in a worst-case scenario, you could be liable to the lender for any shortfall between what the property sells for and what you still owe on the mortgage.

Experiencing mortgage stress?

If you find yourself heading into this type of situation and are feeling 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.