Facing mortgage stress – when a household’s income doesn’t cover its outgoings, including mortgage repayments – is a scary prospect, but with good planning, it can be avoided.
John Tindall, of Accumulus Home Loans in Sydney, says many Australians with mortgages fail to plan well, if at all, for potential interest rate rises or changes in financial circumstances , which can both impact the ability to pay a mortgage.
Facing mortgage stress is a scary prospect. Picture: Getty
He says understanding your true financial position, making additional payments, having an offset account or fixing interest are just some of the ways to avoid mortgage stress.
Tindall says lenders and mortgage brokers use income information and estimated expenses to ensure applicants can afford the loan they’re applying for.
“In fact, they’re doing it at interest rates of 7-7.5%, effectively ‘stress-testing’ your ability to repay,” he says.
“But understanding your own ‘ins’ and ‘outs’ is important in case you need to adjust, so we give our clients a family budget spreadsheet to help manage their finances,” Tindall adds.
A budget will help understand the ‘now’ so the future can be better managed.
“(With a budget), if difficulties arise, then adjustments to a loan and or lifestyle can relieve the stress,” he says.
Making additional repayments is an excellent way to get ahead of normal repayments, with the added benefit of reducing interest, Tindall says.
“Offset accounts are another example, however they can be a little too accessible at times.
“Some lenders may also allow you to take a repayment holiday if the circumstances are right, such as a critical illness or a new baby, but it’s a case-by-case basis,” Tindall says.
Offset accounts are a great solution to avoid mortgage stress, although they can be too readily accessible. Picture: Getty
A fixed interest rate is a great way to provide certainty of repayments, particularly with interest rates currently at record lows, he says.
“Be careful though, as there is often a limit on additional repayments and offset accounts, meaning there is less flexibility as well.”
