Mortgage stress can be caused by various factors such as borrowing too much in the beginning, suffering a job loss, illness or other significant life change. You can do some things before you even get your home loan to help you prepare and other things once you have your loan or are paying off your mortgage to prepare for mortgage stress, avoid or ease it if you have it.
How to prevent mortgage stress
1.) Borrow within your means
When a lender tells you how much you can borrow, that amount is based on the maximum they will lend you based on your circumstances right now. If borrowing as a couple, this means it is based on two incomes. Before you agree to the highest amount you can borrow, think about what would happen if you went to one income due to pregnancy, job loss, health issues or any other number of reasons you can end up on one income. Also, do you want the capacity to save, renovate the home later, have freedom and flexibility with your finances? If so, borrowing the maximum amount a lender will lend you generally isn’t a good idea. Instead,loat your budget and work out an amount that suits you.
2.) Have a deposit
A 20% deposit plus the other costs associated with buying a home are recommended at the beginning. You can get a loan with a smaller deposit, however, you will pay lenders mortgage insurance (LMI) and it gives you less of a buffer in terms of equity with your home.
3.) Use the offset account
If you have an offset account attached to your mortgage, it can help you pay extra off your mortgage without you needing to put extra money into the mortgage itself. All funds sitting in your offset account act as if they are on your mortgage and reduce the interest you pay. For example, if you have a home loan worth $380,000 and have $10,000 sitting in your offset account, you only pay interest on $370,000 instead of $380,000.
4.) Pay extra
When you get a bonus, a pay rise or any extra income, try to put it on the mortgage. By adding those amounts of money you didn’t expect or budget for straight to your home loan you reduce it and create a buffer should you ever need it. With extra money sitting in your mortgage, if you lose your job or need to pause your repayments for a period of time, you have given yourself an amount to do that with.
What to do if you are experiencing mortgage stress
The above tips are great for anyone who isn’t already experiencing mortgage stress. If you are struggling to pay your mortgage right now, here are some suggestions for what you can do.
1.) Go over your budget
Check where you are spending your money and look for ways you can cut back if possible. Check all your bills online to see if you can get a better rate on your insurance, electricity and other bills. Anywhere you are able to spend less will help ease the pressure.
2.) Look at refinancing
Speak to a broker to discuss your needs and see if refinancing to get a better interest rate and features in your loan is an option. Your income, the reasons for mortgage stress, equity in your loan and other factors will determine if refinancing is possible.
3.) Talk to your lender
Lenders want their money back so are generally interested in working with you to find a solution to your mortgage stress. If it is likely to be a short term issue, you can discuss financial hardship and the option of having your payments paused. This will mean interest will continue to accrue and nothing will be paid off the actual loan but it can give you breathing room for a short period of time. You will need to play catch up later and try to pay extra into the loan to get back on track though.
Whatever you do, do not hide your head in the sand. If you are facing mortgage stress, you need to deal with it and make a plan.
If you want to discuss your home loan options, chat with a broker today.
This article is not to be taken as financial advice. Every applicant’s personal situation will vary. We recommend seeking professional advice for your circumstances. All loans are subject to the normal lending criteria.