What is mortgage stress?

Mortgage stress in Australia is defined as spending 30% or more of your pre-tax income on home loan repayments. It’s not a science, but a generally accepted threshold for measuring home loan affordability.

Rates of Australian mortgage stress have skyrocketed since the Reserve Bank of Australia (RBA) began hiking the cash rate to control inflation between May 2022 and November 2023. 

According to Roy Morgan research, almost one-third (30.3%) of Australian mortgage holders in June 2024 are at risk of mortgage stress, totalling 1.6 million Aussies. 

So, how do you know if you’re in mortgage stress, and what can you do to avoid it? 

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.

The symptoms of mortgage stress can 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.

A mortgage stress test helps you work out whether you can afford to service a mortgage by comparing your income to the cost of your home loan repayments. 

It’s a quick and easy way to calculate your mortgage stress level, and all you need to know is your monthly income (pre-tax), and the cost of your mortgage repayments.

How to calculate mortgage stress (the mortgage stress test)

Before you start, make sure you know: 

• Your annual or monthly pre-tax income 
• Your monthly home loan repayment amount. 

If you don’t know what your monthly repayments are, use a mortgage repayment calculator to work that out, and come back. 

If you’re ready for the mortgage stress test, then follow the steps below.  

1. Take your household’s annual income, pre-tax, and divide it by 12 to find your gross monthly income.
2. Divide your monthly mortgage repayment by your household’s gross monthly income. 
3. Multiply that figure by 100 to find your mortgage stress level, expressed as a percentage. 

For example, Jane and Bob have a combined household income of $120,000 and have home loan repayments worth $4,500. 

Their household’s monthly, pre-tax income comes to $10,000, so we divide $4,500 by $10,000 to get 0.45. Multiply that by 100 to get 45%, meaning Jane and Bob are well over the mortgage stress threshold.

It’s best to manage your finances from the start to avoid mortgage stress. This includes: 

• 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).

Not only are these some of the keys to making your home loan more affordable, but they’re also the ‘green flags’ lenders look out for in a home loan application. 

However, if you’re already part of the way through your home loan, and have fallen into mortgage stress, there are some steps you can take to bring your budget back in line and keep you under the 30% threshold. 

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 and let you know your options.

For example, your lender could help you:

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

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 home loan comparison to help find a better deal, improving your finances 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 get worse.