Australia’s workforce has taken an economic battering in the last few months as workplaces try to balance social distancing and safety with keeping the wheels turning.
If you’re feeling the financial pressure to the point where you’re struggling to manage the payments on your home loan, you may be in mortgage stress.
One way to escape this situation is to look into refinancing your mortgage onto a lower interest rate so your repayments can put less pressure on your budget.
What exactly is mortgage stress?
Mortgage stress refers to the pressure on your household budget when a high percentage of your income goes towards your mortgage payments.
Banks and mortgage lenders define mortgage stress differently, but a common benchmark is that if more than one third of your income goes towards servicing your mortgage, you’re considered to be in mortgage stress. For example, if you took home $6000 each month, and $2000 or more went towards your mortgage, you could be considered to be in mortgage stress.
Being in mortgage stress puts you in a risky position. Even if you’re handling your loan repayments just fine for now, you’re more vulnerable to ending up in real trouble if your personal or financial circumstances change – such as when you can’t work at your job because of, say, a global pandemic – and you’re left unable to afford your loan.
Before you apply for a home loan, a bank or mortgage lender will typically assess your income and household expenses to estimate your risk of ending up in mortgage stress. If this risk looks too high, they may decide to decline your application.
To estimate for yourself if you’re currently in mortgage stress, or if applying for a home loan could put you into mortgage stress, you can use the RateCity Mortgage Stress Calculator.
Which home loan rates could help you out?
There are several options available to help you get out of mortgage stress. One of the simplest is to refinance your home loan, either with your current bank or a new lender. Refinancing to a lower interest rate can help reduce your monthly mortgage payments, relieving some pressure on your household budget.
Most banks and mortgage lenders reserve their lowest interest rates for the most secure borrowers, including those who can afford to pay 20 per cent or more of the home value upfront as a deposit.
But if you’ve kept up with your mortgage repayments (possibly even making extra repayments where possible), and if your property has increased in value since you purchased it, you may have equity available in your property. This equity can be used in place of a deposit to secure a mortgage and qualify for a lower interest rate.
When you refinance, you may want to think about your home loan’s term – the length of time you take to pay off your mortgage. For example, if you’re five years into a 30-year mortgage, you could refinance and pay a lower rate for the remaining 25 years, or you could refinance to a new 30-year loan, meaning you’ll have your loan for 35 years in total.
Extending to a longer home loan term can mean paying less from month to month, which can help relieve your mortgage stress in the short term. But the longer you extend your home loan, the more interest you’ll need to pay in total, making your home ultimately cost more in the long run.
Compare the following home loans to see if their potentially lower interest rates could help relieve your mortgage stress. Check the eligibility criteria before you apply – if you’re not sure which option may best suit your needs, consider contacting a mortgage broker.