How to Manage Mortgage Stress & Loan Deferrals

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Mortgages don’t always go to plan. Homeowners are usually in a good position to buy a home when they decide to take on a mortgage. But circumstances can change drastically when you least expect it, leaving you in mortgage stress. Find out how you can reduce mortgage stress and manage loan deferrals so you can take back control of your finances.

What Is Mortgage Stress?

One standard definition of mortgage stress is paying more than 30% of your income on your mortgage. This measure does not apply in all circumstances or to all income levels but it will likely make it difficult for many people to keep up with their repayments. Being indebted can increase stress, so it stands to reason that the responsibility of such a large debt would begin to take its toll. You could be under mortgage stress if you:

  • are living week to week with little to no savings
  • run out of money before payday
  • use credit cards to afford your regular expenses
  • feel worried or frustrated when bills are due.

What Causes Mortgage Stress?

Mortgage stress can happen to anyone. Many people are struggling to meet their mortgage repayments today because housing prices have risen faster than wages. This often means homeowners are borrowing almost five times their yearly income, or more, to purchase a property, which is bound to increase stress levels.

Even then, you may manage the repayments, but all it takes to send you spiralling into mortgage stress is one unexpected change in your circumstances. For example, you or your partner could:

  • suddenly be out of work
  • become ill
  • be affected by an unexpected local, national or global event, like the coronavirus pandemic
  • experience a relationship breakdown
  • see an interest-rate rise increase your repayments
  • incur large, unexpected expenses, like medical bills, home repairs or car replacement costs. 

The best option is to plan ahead for the unexpected so you will still be able to afford your mortgage repayments. If you’re already in mortgage stress, it’s not too late to do something to reduce your stress and get you back on track. If you become ill or have an accident, it’s worth checking whether you have income protection insurance to cover your mortgage repayments.

In pre-covid 2020, almost 20% of Australians were under mortgage stress. This reached nearly 40% during the coronavirus pandemic.

How to Lower Mortgage Stress

If it is proving difficult to meet the financial obligations of your home loan, there are things you can do to regain the right balance in your finances. Not all options will be right for you, so it’s important to carefully consider your options and determine how they will affect your finances.

Here are our top 10 ways to reduce mortgage stress:

1. Create a budget

Create a budget
Create a budget

It sounds simple, but a budget can really help. You might already have one in your head, but getting it down on paper will allow you to better visualise future expenses and see areas where you could reduce costs.

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If you struggle to afford large, irregular expenses, like new tyres for your car, saving even a few dollars a week towards these costs can make them more manageable.

2. Reduce spending

Once you have an accurate budget, you can begin to look for ways to cut down your costs. For example, you might find that buying fewer coffees or lunches can save you $50 a week. When you’re under mortgage stress, every dollar counts. It’s important to buy only what you need, not what you want. This can be tough but it’s well worth it once you get to the other side.

3. Find better deals

Your budget will show the cost of your utilities, your mortgage and other debts. Once you know this, you can shop around for better offers. You might find a cheaper provider that can help you increase your available funds. 

Make sure you check whether there are exit or application fees that could reduce the benefit of switching.

4. Pay the most expensive debts first

Pay credit cards to reduce mortgage stress
Pay off credit cards

Debt with the highest interest rates will cost you more in the long run if you don’t pay them off as quickly as possible. If you are deciding to apply for financial hardship with a provider, it’s best to do it with your least expensive debts and continue to make full repayments on your most expensive debts, like credit cards with high interest rates.

5. Increase your income

If you can, finding extra work, even for a few months, can help alleviate financial stress and get you back on track. It’s important to find a balance though because you don’t want to swap financial stress for time stress.

If you are unable to find extra work, you may be able to access government assistance to boost your income. During the early coronavirus lockdowns, the government announced Jobseeker and Jobkeeper packages to help both individuals and businesses. They also announced the possibility of accessing superannuation early, so it’s always worth checking what is available. 

6. Refinance your loan

Refinancing your loan can save you money and make your payments more manageable, but it is not always the best choice. Whether you ask your lender for a better deal or find another lender, always do a comparison to see if it will save you money in the long run. It’s important to compare:

  • the exit and entry fees
  • the interest rate
  • the interest paid over the length of the loan
  • any additional fees. 

Usually, the best option is to switch to a loan with a better interest rate but avoid extending your loan. However, if you are at risk of losing your home, lengthening your loan at a lower interest rate can make monthly repayments affordable and may be worth the overall increase in interest paid. 

Compare home loans with this mortgage switching calculator.

7. Consolidate your debt

If you have your mortgage repayments under control but are struggling with other debts, consolidation may be the answer. Credit cards and the like may charge up to 20% interest. If you consolidate these debts with your mortgage at the much lower rate, you can save money and pay for everything in one repayment. Be careful to check whether this will add years to your home loan, as savings now could mean added interest later.

8. Downsize your home

Sell your home to reduce mortgage stress
Sell your home

If you have tried budgeting but you just can’t seem to get ahead, it might be time to sell your home and buy something more affordable. 

READ MORE: How to Sell Your Property Fast

It can be a difficult choice to make, but it is always better to sell your home yourself than have the lender repossess it. You might find the perfect home that better suits your financial situation and find you enjoy it more now that you’re no longer under mortgage stress. A good agent will get you through this tough time with the least stress possible.

9. Rent out your home

Rent out your home to reduce mortgage stress
Rent out your home

If you don’t want to sell but can’t afford your repayments, you could rent out your home. This can really help if you have somewhere to stay that is either cheap or free. Even if it’s just for a year, it can help get your finances back on track and allow you to move back in later. 

Moving can be costly, so be sure to factor this in to your decision-making process. Read more about the cost here.

If you’ve decided to rent out your property, finding a good real estate agent is vital to ensuring it is a straightforward and low-stress process.

10. Apply for a hardship variation with your lender

Any homeowner can apply to their lender for a hardship variation if they are struggling to pay their repayments. Each lender has a team on hand to work through the best options with you. This could mean reducing your repayments temporarily, deferring your repayments temporarily or offering you better terms on your home loan. Always consider the short- and long-term effect of your hardship variation before deciding if it is the right option for you.

What Is a Loan Deferral?

A loan deferral essentially pauses your repayments for a period of time. Many homeowners were offered a 6-month deferral during the early coronavirus pandemic lockdowns and some received an extension once the initial 6-month period came to an end. But it’s not just during major events, like a pandemic, that this option is available. You can talk to your lender at any time during your home loan if you think you need a hardship variation.

Paying a little on your mortgage each month is better than not paying anything at all.

How to Manage a Loan Deferral

If you are approved for a loan deferral, you will still be charged interest during this period. The repayment break will either increase your monthly repayments once your repayments restart, lengthen your home loan period or both. Any increase in the length of your loan will mean you pay more interest over the life of the loan, so the shorter your repayment holiday, the better.  Here are some things to consider when deferring your mortgage repayments:

  1. Can you afford a lower repayment? It’s almost always better financially to apply for a reduction in your repayments instead of a deferral.
  2. Can you opt to make interest-only repayments in the short-term?
  3. Can you increase your repayments after the deferral period to avoid lengthening your loan period?
  4. Will lengthening your loan period help you get through a tough time and avoid the risk of losing your home?

Selling As A Last Resort to Reduce Mortgage Stress

Once you have considered how you can reduce mortgage stress, you might find that selling your home becomes a more attractive option. If so, it’s vital to sell on your own terms to maximise your gain and achieve your financial goals. An experienced real estate agent can discuss options with you and help you get the best price for your home.