You might be comfortable paying off your mortgage now, but what if things change? Here are some tips on how to avoid a mortgage stress fracture.
Paying off a mortgage is one of the biggest financial challenges you and your family will ever tackle.
And it isn’t easy – mortgage repayments take up about one-quarter of a family’s income on average, according to the Australian Bureau of Statistics’ 2016 Census.
While most families manage, what happens if your circumstances change?
An unexpected redundancy, relationship breakdown, illness or accident can dramatically impact your ability to make your payments and put you in mortgage stress.
But first, what is mortgage stress?
While there isn’t a technical definition for the term, mortgage stress is generally considered to occur when a person or family is spending 30% or more of their income on home loan repayments.
There are also a range of other criteria which would suggest you’re experience mortgage stress.
If you’re paying only the interest on your home loan, borrowing money from family, or having difficulty paying your bills, then you might be experiencing mortgage stress.
I don’t have a problem now, why worry?
It’s unwise to assume your circumstances will never change. An accident or illness can befall a person at any time, and the impact on your finances can be devastating.
An increase in interest rates can also have a significant impact on your mortgage repayments. A simple 0.25% rate hike can increase repayments on the average Australian loan ($375,000) by about $50 a month.
Over the course of a year – and with a potential of further rate hikes – this can really chew into your disposable income.
Ok, so how can I avoid it?
The smart borrower won’t wait for their circumstances to change, they’ll start planning now to make sure they can weather a storm if it hits.
Steps you can take to reduce your risk include:
Step 1: Use a mortgage calculator to see what your repayments would will look like if there was a rate increase. Would you be able to keep up?
Step 2: Review your current income and expenses, and make a new family budget. Use it to track where your money is going and where savings can be made, so you can either pay off your mortgage sooner or get by if things go awry.
Step 3: If you’re worried about your mortgage, or concerned about the impact of a future rate hike, come pay us a visit.
We can talk to you about your situation and help you make a plan to ensure a small problem doesn’t become a big one.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
Hot Off The Press, Courtesy
Of Channel 9 News
Almost one million Aussie households are
staring down a mortgage ‘time bomb’
Almost one million middle-income Australian households are facing a mortgage time bomb as soaring living costs plunge families into repayment stress.
A new analysis by Digital Finance Analytics (DFA) has shown that the number of households currently in mortgage distress has risen by 20 percent in the last six months to 910,000.
At the current rate, more than one million households will be struggling to make repayments on their home loan in 2018.
Primary factors ratcheting up the stress faced by families include stagnant wage growth, living pay cheque to pay cheque and the looming threat of a rise in interest rates.
Martin North, Principal of Digital Finance Analytics, says that the risks of more middle-income families borrowing enormous loans from the banks are rising.
“Risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved,” said North.
“The number of households impacted are economically significant, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at three times income.
“This is not sustainable.”
Broken down by region, NSW had the most households in stress with 238.703, followed by Victoria with 250,259, Queensland with 162,726 and WA with 121,393.
Households are defined as being “stressed” when their net income does not cover ongoing costs, including repayments on their home loans.
Households that have a tight budget but manage to make ends meet are defined as being “mildly stressed”, and those who are unable to make a mortgage repayment within the next 30 days are defined as being “severely stressed”.
Nine Network’s Finance Editor Ross Greenwood said that it’s “pretty obvious” why families are struggling.
“Families are struggling with rising costs. Rising health insurance premiums, rising electricity bills and on top of that, many families have taken on very big mortgages,” said Greenwood.
“Now if their wages aren’t growing fast then quite clearly they are going to struggle.
“Another worrying statistic is that there are now 52,000 households that this organisation has identified that are now 30 days behind on their mortgage repayments, that means technically banks could walk in and close them up.”
I have been in the mortgage brokering industry now for approximately twenty years and I have now seen a whole generation of Australians take out mortgages who have no experience of what a 7-8% interest rate mortgage is. Many of these borrowers insisted on borrowing to their maximum capacity. Although in the last six months banks have been tightening up on what any new borrowers can get loan amount wise, there is still many years of previous borrowers who pretty much were able to borrow almost anything they wanted.
Recently we have seen not only banks but many other commercial enterprises prey on the Australian consumer with increased prices (energy companies being one of the notable ones). Although many borrowers have budgeted diligently there would be very few of them that would have factored in some of the essential services price rises we are seeing.
For many there may not be a solution, however our advice is to drill down on your budget and find every last cent you can find and start paying it onto your mortgage. I would recommend you beg, borrow, and tighten your budget belt to find whatever you can to pay toward your home mortgage in order to escape the mortgage stress that may be headed your way in the not too distant future.
Also, get with your home mortgage broker, because if you have a 4 in front of your home mortgage you are probably paying too much.