With more and more interest rate rises happening it’s important to take stock of your current financial position, reach out to us and have current market appraisal done, it may uncover a better equity position and allow you to move to a lender with an improved loan product for you.
There are many definitions of what mortgage stress is. The general consensus is that households experience mortgage stress when mortgage repayments are more than 30 per cent of the household income. According to 2016 Census data, the majority of two-income households earn enough to avoid mortgage stress, although this may change when rates do increase.
While no-one can predict exactly what will happen in the future, there are ways we can avoid, or at least manage mortgage stress when rates do increase.
Don’t let your heart take over when buying
It’s always a good idea to purchase a home based on the market, picture yourself as an investor, do the research and don’t put yourself into a tough financial position because the negotiations don’t go your way. There have been many buyers that have ended up with buyer’s remorse down the track when they realise they paid too much for their ‘dream, home’
Buy what you can afford
It can be tempting to stretch your budget to buy the home of your dreams. While the stretch may be possible at the moment, will it be sustainable if conditions change in the future? Will you still be able to make repayments if rates go up? What happens if you lose your job? Being realistic about what you can afford now, but also in the future, means you are less likely to experience mortgage stress.
It may be a case of buying in a less expensive suburb, buying an apartment rather than a standalone (but beware the sinking fund and other associated extra costs of strata buildings) , or buy a property that needs a bit of work and be patient until you can make changes. Avoid the temptation of scraping into the housing market. You want to have money to spare, should things change in the future.
Prepare for the future
Have a contingency plan in case you lose your income in the future, or face other challenges that make it hard for you to meet your repayments. Income protection insurance will help meet repayments should you ever lose your income due to injury or illness. It may also be worth both you and your partner taking out life insurance, should one of you pass away.
Create a budget
Analyse your finances to know exactly how much money is coming in, and where money is being spent. Doing this regularly will help identify if you are susceptible to mortgage stress. If your mortgage repayments are creeping up towards 30 per cent of your household income, consider ways to reduce expenses.
Analise your budget to see where expenses can be minimized. Less meals out? Less retail shopping? It all adds up. It’s also worth talking to an industry professional about ways to reduce your mortgage repayments, should rates increase. You may also be in a position to re mortgage your property over a longer period, which reduces your weekly repayments (although if you’ve paid a fair bit of interest you need to factor this in as anew loan will back to mainly interest repayments. .
Get ahead while the going is good
While rates are low and your income is good, you might consider increasing your repayments to create a healthy surplus. That way, if mortgage stress does occur you’ll be ahead, and in a position to reduce your cash repayments. Talk to your lender about a mortgage redraw which will speed up your loan repayments and give you a buffer in tough times.
Don’t hide your head in shame
If you start to experience mortgage stress it pays to get onto things quickly, we can guide you on a number of ways to ensure you are able to release your debt or manage it, for example you may choose to rent the property out as we are experiencing record low vacancy rates and amazing rental returns.