Mortgage stress is when homeowners find themselves struggling to maintain their loan repayments as well as regular living expenses. While many people might worry a little about their home loan repayments from time to time, mortgage stress is more than just that: it’s the immediate concern that you might not be able to make your next mortgage repayment, or future payments after that.
If this sounds familiar, don’t worry, you’re not alone. Australia’s housing affordability is at an all-time low, and personal debt is at an all-time high. This means that many Australian household budgets are already stretched, and even a small change in circumstances might lead to difficulties in making the next mortgage payment. An event like an interest rate increase, illness, change in employment or divorce can come when you least expect it to, and change your situation overnight.
It doesn’t matter what the cause is of your current financial situation; if you’re feeling mortgage stress now, the most important thing to do is to act quickly and make sure a difficult situation doesn’t get any worse.
The first step, which you’ve probably already considered before reading this, is to work on your household budget and see if it is possible to reduce your regular living expenses to a point where you are able to make your loan repayments again. However, in most cases of mortgage stress, simply “tightening your belt” isn’t enough, and you will likely need to do more.
Buying Yourself a Little Breathing Space
If you’ve tried your hardest to meet your repayments, but you still can’t make it work, don’t worry, there are many steps you can take to give yourself some breathing room.
Your first step should be to talk to your bank or lender as soon as possible. While you might be tempted to hide your financial issues from the bank, it’s much better to be up-front with them and work towards a solution together. There’s no shame in being honest with the bank about your situation, because they’ve seen it before and may be able to help.
Mortgage Hardship Variation
Most people will have access to the option of applying for a Mortgage Hardship Variation on their loan. This means you talk to your bank in detail about your situation, and together come up with some options to help you meet your repayments. You may have to provide documentation to show why you can’t afford your current repayment schedule, as well as evidence of your income, and what repayments you can realistically afford.
If you’re approved for a mortgage hardship variation, your bank might offer you options for a period of time, like payment holidays (i.e. no repayments at all), or reduced payments.
For some helpful information about the hardship variation process, check out the Financial Rights Legal Centre.
Another option could be to switch your loan to interest-only mortgage repayments. In interest-only repayments, you only repay the interest on your loan, not the principal (the actual amount you had to borrow from the bank to purchase your property originally). This means that your repayments can be considerably lower. But while interest-only mortgage repayments are lower than principal & interest ones, be aware that when the interest-only period expires or comes to an end, the loan will switch back to principal & interest — which can be higher than your original repayments because the principal is now repaid in a shorter period. Interest-only repayments shouldn’t be seen as a long-term solution, but they can certainly help get you back on your feet in the short term, if you’re comfortable with the conditions of doing this.
Refinancing Your Home Loan
Refinancing and switching home loans may offer some relief but it’s important to do your homework, so you don’t get stung. Unfortunately, people have been caught out by not reading the fine print of their new loans and then being hit with significant fees and higher interest rates, or worse, falling victim to dodgy lenders who send them into even more debt. For some great advice on how to avoid falling into refinancing and debt consolidation traps visit the Australian Securities & Investments Commission (ASIC).
Selling Your Home
Selling your home can often seem like the last resort, an extreme or drastic solution to mortgage stress. This option is often the hardest one for people in mortgage stress situations to investigate, because the possibility of moving out of your beloved home feels like a big decision.
While the thought of selling your home is hard, it might actually be far less stressful than falling behind on repayments and having the bank foreclose on your home. In a foreclosure situation, as well as being required to pay your own legal bills, the bank or lender is likely to pass on the legal costs they’ve incurred in the repossession process.
If you’ve considered all the options above for managing your mortgage stress and still can’t make the numbers work for your financial situation, selling might be your best option.
Once you’ve reached a decision to sell, time is usually a factor — you’ll want the property sold as soon as possible to get yourself back into a more comfortable financial position.
In situations where selling fast is the main concern, real estate agents often move into what they call “fire sale” mode: sell the property as fast as possible and get a quick settlement, usually for a lower price than market value. This does often achieve a relatively quick result, but even with a quick settlement, you might still need to make several more mortgage repayments yourself.
A better option if you need to sell quickly is Sellable — a unique way to sell your home where you can receive an upfront Guaranteed Price based on the market value of your property fast (usually in 7 days). After that time, Sellable will work to make improvements to your property to optimise the final sale price. If a sale price is achieved above the Guaranteed Price, you also get to keep 75% of this upside — which could help repay any other debts still owing, and set you up for a brighter financial future.
Regardless of which of the above approaches you use to tackle your mortgage stress, remember that the key is to act now, before your situation gets any worse. It’s a scary and difficult situation for anyone to have to face, but if you carefully consider all the options, then take action quickly, things can better soon.
Disclaimer: The information provided in this article is of a general nature only. It is intended to be factual and should not be used as financial advise. Please consult your financial adviser to take into account your individual financial circumstances.