How to cope with mortgage stress
24th September 2020 - Freya Cormack
Sometimes life can throw you a curveball, making it difficult to cover your necessary expenses. If you are experiencing mortgage stress that is hindering your ability to make home loan repayments, here are some possible solutions:
Consolidate your debt
If you have other forms of debt in addition to your mortgage, debt consolidation could be the answer. This debt management strategy allows you to combine any personal loans, car loans and credit card debt with your home loan. By doing this, you only have to make one monthly repayment, rather than individual repayments for each of your debts.
The benefit to this is that all your consolidated debt will be charged the same interest rate as your home loan. Home loan interest rates are typically much lower than unsecured debt rates, so you could make big savings.
When consolidating your debt, you’ll be able to choose a repayment period for your consolidated debt, within your mortgage. For example, you could give yourself 3 years to repay your personal loan, within the 10 year period left on your home loan. This ensures that you won’t overpay in interest for your lesser debts.
Assess your spending habits
See if there are any areas you could cut back in, spending-wise. Even little things, like buying the cheaper off-brand butter instead the name brand one can make a difference.
We live in an age of subscriptions and ongoing expenses like this can really add up. However, don’t forget to prioritise your wellbeing. While a gym membership might seem like an unnecessary expense to someone else struggling financially, it could be a source of stress relief for others.
There isn’t a one-size-fits-all approach to spending. What is a spending priority for one person could be deemed unnecessary for another!
Consider creating a realistic budget to track your spending and hold yourself accountable. The Australian Government provides a free budget planner through Moneysmart.
Refinance your home loan
There are many different steps you can take while refinancing to make your mortgage repayments more manageable. Here are a few:
Extend your loan repayment term
By extending your loan repayment term, your monthly repayment amount will decrease. This could be the relief you need. You can even reduce your loan term back down later if you are financially able to do so.
It’s important to know that by extending your loan term, you will end up paying more in interest over the life of your loan.
Find a lower interest rate
A lower interest rate can potentially save you thousands of dollars over the course of your loan. When interest rates are super low, you should try to take advantage of the savings.
For some struggling borrowers, even a marginally lower interest rate can make all the difference — even if their repayments are just $100 lower every month.
Depending on your bank, you might not even have to switch mortgages to secure a lower interest rate. Check whether your bank is offering lower interest rates to new customers. If they are, get in touch and ask them to lower your rate to match the rate new customers get. A mortgage broker can do this on your behalf, if you prefer.
If not, don’t be afraid to see what other banks are offering.
Switch up your loan structure and add features
If your mortgage stress is in relation to a lack of security in your current mortgage, you may like to switch to a fixed interest rate. A fixed interest rate won’t fluctuate, meaning that you can be certain of how much you need to pay every month.
On the other hand, a variable interest rate can help you make the most of low interest rates and loan features. You will also have the option to make unlimited extra repayments on top of your minimum amount.
If you have savings, you could add them to an offset account attached to your loan balance. Any funds in the offset account will subtract how much interest you have to pay.
For example, if you have $100,000 in your loan balance and $10,000 in your offset account, you’ll only pay interest on $90,000. Plus, you’ll have easy access to the funds in your offset account when you like. A redraw facility is similar, but the funds come from pooled extra repayments made on your home loan.
Find a cheaper property
By selling and downsizing your current home, your mortgage expenses will decrease. This is a more extreme option and a very difficult decision to make. However, if your financial situation is looking unlikely to improve in the near future, this might be your best option.
When you’re in control of selling your home, you can get a better price and likely avoid the costs associated with your bank repossessing and selling it. Seek advice from a financial or legal professional to decide whether this is the right move for you.
Alternatively, if you are able to live somewhere else (e.g. with family, friends or in a cheaper rental), you could try to rent out your home until you can get a handle on repayments. If you have a spare bedroom, you could even try renting out that room on Airbnb or find a more permanent flatmate.
Get a second job or find a side hustle
While this isn’t an ideal option for many homeowners, it could be a short-term solution to help you get back on your feet. There are a lot of flexible casual, part time and freelance work opportunities available. Nowadays, there are many online jobs, such as virtual assisting and copywriting.
There are plenty of ways to make money quickly. Many of them don’t even require much work. Options could include:
- Delivery services
- Renting out your car
- Selling unwanted items through Gumtree, eBay, Depop or Facebook Marketplace
- Dog walking or pet sitting
- Participating in research focus groups
- Find odd jobs on platforms like Airtasker
Prevent and avoid mortgage stress
The best thing to do to avoid mortgage stress is to prevent it altogether. Start by building a solid emergency fund. The longer you can live off your emergency fund, the better.
It may also be smart to avoid interest only mortgages, which are deemed a riskier home loan structure. With an interest only mortgage, you only pay the interest accumulating on your loan balance for a period of 1 to 5 years. At the end of this period, your repayment amount will increase to start covering the principal (loan amount).
When you are able to, it is beneficial to make extra repayments on your home loan. Doing this will increase your equity and give you more flexibility to refinance and restructure your mortgage in future years, should you need to.
Another smart preventative thing to do is to not reduce your repayments when interest rates drop. If you are comfortable making $1,500 P&I repayments each month, why bother reducing to $1,300 when interest rates go down? If you maintain those higher repayments, your loan balance will be paid down faster and your equity will increase.
Talk to your bank or a financial professional
Sometimes mortgage stress is completely beyond your control. If you don’t know how to move forward, it’s smart to contact your bank for assistance. Banks will have a financial hardship team to provide case-specific guidance to you about how to proceed with your mortgage.
Your bank doesn’t want you to default on your repayments and they don’t want to repossess your property. So, they’ll try to work out a solution with you to avoid these extreme consequences.
Alternatively, a mortgage broker may be able to provide you with different options and can negotiate with your bank on your behalf.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
^The estimated average future interest savings is calculated as at 15 April 2020 based on Lendi assisting customers into new loans with an average interest rate reduction of 0.89% for the 11 months prior, and assuming a median loan term of 26 years on both the old and new loan and all monthly principal and interest repayments will be made on time. Any future savings figures are estimated averages only, and do not take into account any product features or fees (including refinancing or break costs). Your savings will be different.