How to avoid mortgage stress

Feeling the pressure with mortgage repayments? Stress less with this essential guide.

With property prices rising all the time, many first home buyers are stretching their budget just to get into the market. However, if you’re borrowing right to your limit, be mindful to avoid mortgage stress.

What is mortgage stress?

While the definition varies, the most common marker of mortgage stress occurs when your mortgage repayments are more than 30% of your household gross (pre-tax) income.

For a couple who earn a combined $150,000, 30% is $45,000 or $3,750 per month.

You may be meeting your mortgage repayments on time and still be in mortgage stress. At 30% of your pre-tax income or over, servicing your mortgage has a huge impact on your budget. If interest rates rise, your hours are cut or unexpected expenses arise, it could mean you struggle to keep up with payments.

While unfortunate, mortgage stress happens to many of us. Data collected by Digital Financial Analytics has found that 1.52 million households, or around 38%, were in mortgage stress. Most of the time, it’s a temporary state of affairs and resolves itself. However, if you’re really struggling, there are a few steps you can take.

How to avoid mortgage stress

Prevention, as they say, is better than cure. If you can, resist the temptation to borrow at the top of your budget. Don’t be led by what a bank will lend you: look at your income and expenditure with clear eyes and decide what’s comfortable for you.

As a rule of thumb:

• Stick to the 30% rule where possible: your repayments shouldn't be more than 30% of your pre-tax income.
• Make sure you’ve included all your expenses, not just the big bills. You might be surprised at how much money it really takes to run your household.
• Consider upcoming changes; planned and unplanned. Would you be able to meet your basic expenses and mortgage repayments if one partner left their job, or took parental leave, or had a protracted illness?

Carlisle Homes offers a comprehensive budget planner to help you see what you have available for mortgage payments, as well as a repayment calculator so you can work out how much you can really afford to borrow.

In the current housing market, it can feel as if you need to bid above your limits just to secure somewhere to live. To avoid getting swept up in a bidding war for an existing home, consider a fixed price house and land package instead. Best of all, Carlisle is offering the chance to lock in your base home price and inclusions for the next 18 months!

Carlisle Homes have three ranges to choose from so there’s something for every budget. Choose EasyLiving for stylish, affordable options; T-Range for lifestyle homes with unique character and premium inclusions; or our top-of-the-range Affinity Collection homes with sophisticated design and architectural detailing.

You’ll know your costs ahead of time, without a ticking clock hanging over your head.

If you’ve already signed up for a hefty mortgage, here are a few things you can do.

• Cut costs elsewhere by going through your expenditure and checking for better deals on insurance, cancelling unused subscriptions and tracking discretionary purchases. Learn more about budget tips and tricks here.
• See if you can refinance at a lower rate, especially if you’ve held your mortgage for at least 18 months. Learn more about choosing the right loan structure for you here.
• Use any excess funds in your offset or redraw facility to pay your mortgage temporarily.
• Look for ways to increase your income, either by working a side hustle or by selling things you no longer need.

What can you do if you find yourself in mortgage stress?

If you’ve tried the above and you’re still struggling, it’s important that you don’t suffer in silence. The sooner you take action, the more options you have. Here are some alternatives to explore.

Switch to an interest-only loan. This is a great option if your stress is temporary (for example, if you’ve been sick and unable to work your usual hours, or a large expense has come up that you’re still repaying). It will reduce your monthly repayments, but do be aware that interest-only loans cost you more in the long term. Because you’re not paying down your principal, you end up paying more interest overall. If your mortgage repayments are causing financial stress, refinancing might provide relief. The Mortgage Refinance Calculator can help you explore potential savings and determine if switching loans is the right move for you.  

Check with your lender about hardship assistance or mortgage holidays. Your bank would rather you spoke up early and asked for help. That help might include:

• Restructuring or consolidating existing loans (if consumer debt is impending your ability to meet your mortgage repayments).
• Waiving break fees on existing term deposits so you can access the cash early.
• Offering a temporary pause on mortgage repayments or credit card repayments, which may be deferred to a later date.

If you’ve been impacted by COVID-19 shutdowns or natural disasters such as floods or bushfires, many banks also offer targeted assistance for eligible borrowers.