If more than 30% of your pre-tax income is being put towards mortgage payments, you will likely join those suffering from mortgage stress.
Almost one-quarter of mortgage holders were at risk of mortgage stress in December 2022, and it’s expected that the number will increase as the year goes on.
The RBA has been increasing interest rates since May 2022 in response to soaring inflation (currently at 7.8%), with the official cash rate currently at 3.35% (the highest since 2012).
This has been reflected in the amount of interest that home loan owners have to pay on their current mortgages. What may have once been an affordable repayment when they first applied for the loan may now be a dollar-by-dollar stress.
For example, the average borrower with a $500,000 loan is likely paying an extra $908 a month since rates started to rise last May. For a $750,000 loan, the latest rate increase to 3.35% means an extra $1,362 a month since May.
The risk of mortgage stress is greater in households that have seen some sort of change of circumstance, such as a loss of income or employment. This means that homeowners often have to make many difficult decisions about expenses to ensure that repayments can be made.
How Can I Minimise The Impact Of Mortgage Stress?
- Make Extra Repayments
Anything you pay on top of your regular repayments goes towards paying down the principal portion of your loan. Since interest is charged on the principal, if you can chip away at it ahead of schedule you’ll pay less in interest overall.
- Make A Lump Sum Payment
Whether it’s a tax return, a birthday gift, or part of an inheritance, putting any large sums of money you receive towards your mortgage will chip away at the outstanding balance, reducing the interest charged on your loan.
- Put Your Offset Account To Use
An offset account is a transaction account linked to your home loan, with one key difference: the funds held in the offset account are offset against the loan principal. For example, if you have a loan balance of $400,000 and $50,000 in your offset account, you’ll only be charged interest on $350,000.
- Refinance Your Loan
Make sure you check out other options on the market to see how yours compares, and if there are cheaper loans out there, it might be worth refinancing.
- Reduce Your Spending
Sometimes it can help to look very closely at your finances and see if there are any opportunities to cut back. You’d be surprised how quickly small, regular purchases can add up, and if you can eliminate them it can free you up to make extra repayments on your loan.
- Make more frequent repayments (If You Can Afford To)
Depending on how your lender calculates your repayments, switching your repayment cycle from monthly to fortnightly or weekly might save you money in the long run.
How so? If you pay $2,000 monthly, your yearly repayments will total $24,000. But if your lender halves the amount you pay monthly and charges it every two weeks instead, you’ll actually pay back $26,000 over the year.
If you are already in a situation where repayments are becoming more difficult, it is strongly recommended that you contact a professional adviser or a mortgage broker as soon as possible to avoid defaulting on your mortgage.
If you are interested in achieving a better retirement outcome, feel free to book a call with our SMSF Specialist – Natalia Clack here.