What is mortgage stress & how to avoid it

With the cost of living rising and subsequent interest rate rises by the Reserve Bank, many Australian households are feeling the pinch of mortgage stress. So how can you avoid it?

A mortgage is usually the biggest monthly expense a household will have. If you take out a loan that’s more than you can comfortably afford, you could find yourself under mortgage stress.

What is mortgage stress?

Mortgage stress is commonly defined as when a household is spending more than 30% of their pre-tax income on mortgage repayments. If you’re currently spending more than this amount on home loan repayments, you’re not alone. According to the most recent data from Roy Morgan, an estimated 1.03m Australians were at risk of mortgage stress in the three months to October 2022.

How to avoid mortgage stress

Don’t overstretch yourself

Be realistic about what you can afford when choosing a property to buy to make sure you can afford to repay the home loan. Use a loan repayment calculator to help you understand how much you can comfortably afford to borrow with your budget. Don’t forget to give yourself a buffer so you can absorb a rate rise of 1 or 2 per cent.

Use an offset sub-account

Reduce your mortgage stress by having an offset sub-account. This allows you to offset the balance of your mortgage with the amount you have in your offset sub-account. This means you’ll be charged less interest on the loan, so more of your monthly repayments will be paying off your principal (your debt). This can reduce the length of your loan and potentially save you thousands.

For example, if you had a $500,000 loan balance and $50,000 in your offset sub-account, you’d only be charged interest on $450,000 of the loan.

Give your home loan a health check

It’s important to assess your home loan every couple of years so you have an idea of whether or not your mortgage is still right for you and whether your lender still offers a competitive rate in the market.

Consider a split loan

A split loan involves having one portion of your loan charged at a fixed interest rate, and the other portion charged at a variable rate, which gives you the best of both worlds. In a high-interest rate environment, having a bigger chunk of your loan fixed means your monthly repayments won’t increase any further, while if interest rates begin falling you can take advantage via your variable rate.

By Marie Mortimer - Your Property Investment Mag Jan 2023