What is mortgage stress in Australia?

In Australia, mortgage stress is when a borrower struggles to repay their home loan. The standard for mortgage stress is when a borrower has to devote 30% or more of their monthly income to mortgage repayments. 

Without intervention, mortgage stress can spiral into a home loan hostage crisis or mortgage prison. Borrowers experiencing mortgage stress are also more likely to fall into arrears or default on their home loan payments, which can lead to a forced home sale to get out of debt. 

Home loan lenders try to prevent mortgage stress through responsible lending practices. They stress test the borrowers’ finances to ensure they can afford the loan size and mortgage type they want. 

While mortgage stress can be hard to handle, it can also be temporary. There are a few tactics borrowers can use to alleviate mortgage stress and get on top of their home loan. 

Let’s run through what you need to know about handling mortgage stress.

The threshold for mortgage stress in Australia is spending 30% or more of your pre-tax income on home loan repayments. General housing and rental stress also use this standard.

Some symptoms of mortgage stress include:

• Deprioritising other bills, or missing payments altogether.
• Spending more than you earn on living costs.
• Living paycheck to paycheck.
• Dipping into your savings to afford repayments.
• Seeking financial assistance from family and friends.
• Strained social, physical, and mental health. 
• Financial stress. 

If your budget is stretched, you might also have trouble absorbing sudden emergency expenses, like medical bills or car accident repairs.

Mortgage stress can happen for a variety of reasons. Usually, it’s because one of two basic things happens:

• The cost of your mortgage repayments goes up, usually because your interest rate rises. 
• Your amount of disposable income goes down. This can happen if you lose your job, have a kid, or have to spend more to meet the cost of living. 

Both lifestyle changes and larger societal factors can affect your financial situation and lead you to mortgage stress.

Lenders have obligations to make low-risk investments, so they put all mortgage applications through serviceability tests to make sure that future borrowers can afford the home loan they want.

This includes running:

• Credit score checks.
• Debt-to-income ratio tests.
• Calculations on whether you can afford interest rates up to 3% higher than the one you’re applying for. 

These calculations tell the lender what your borrowing power is, i.e. how much they can safely lend you before you fall into mortgage stress. Different lenders have different comfort levels regarding risky lending, so one lender might offer you a larger home loan than another. 

However, it’s in the lender’s best interest to only give you a loan they believe you can genuinely afford. If they think you’re good for it, they’ll give you the money. If not, they won’t. 

One of the better ways to avoid mortgage stress is to manage your finances from the start. This can include:

• Opting for cheaper properties.
• Locking in a low fixed interest rate.
• Setting aside consistent genuine savings.
• Keeping other living expenses, like utility bills, down.
• Paying at least 20% deposit to avoid Lenders Mortgage Insurance (LMI).

These are some of the key ways to keep your home loan affordable. They are also the green flags lenders look for in a home loan application since they make you less risky as a borrower.

However, if you start experiencing mortgage stress, it doesn’t mean you did something wrong. Sometimes factors outside of your control, such as Reserve Bank rate hikes or inflation, can make the cost of living and housing harder to afford. When this happens, it’s time to triage your home loan budget.

The most important thing to remember is that mortgage stress does not go away on its own. You will need to get proactive.

The first step when you start experiencing mortgage stress is to call your lender. Your lender will have a team of home loan specialists who can help you manage your mortgage and budget, as well as let you know what your options are.

For example, your lender could help you:

• Negotiate a lower interest rate.
• Prioritise your bills.
• Come up with a savings plan.

The main goal is to either increase your available income or decrease the size of your mortgage repayments. These can help balance the ratio and take you out of mortgage stress. 

However, if you’re still experiencing mortgage stress after talking to your lender, it might be time to consider refinancing your mortgage.

Refinancing will involve comparing home loans so you find a better deal, getting your finances in order to meet serviceability requirements, and going through the application process. While it can be time-consuming, it’s better to be proactive about your mortgage than let the problem worsen.

Compare low-rate home loans in the table below.