Dealing with debt
How to deal with the results of mortgage stress
What is mortgage stress?
Mortgage stress is usually defined as when a homebuyer is paying 30%-35% or more of their income on home repayments. This is based on the general rule, that lenders prefer not to allow a housing loan payments, calculated over a 25 year period, to exceed one third of monthly household income.
When this occurs, it can lead to mortgage difficulties and a potential crisis. If this describes your position, here are some options for coping with and managing the situation. Many of the problems occuring at present, are as a result of 100% mortgages and refinancing of loans, usually by non mainstream lenders. A relatively minor change in circumstances can spark a crisis, especially when your budget is finely tuned.
If you are suffering mortgage stress, take heart there is help at hand. Treasurer Wayne Swan announced in June that all 144 Australian retail banks, credit unions, and building societies have joined the federal mortgage relief plan, set up to assist those struck by financial hardship. Westpac, ANZ, NAB, and the Commonwealth Bank all joined the Government plan in April.
It grants borrowers up to 12 months suspension of mortgage payments when undergoing hardship, such as job loss. It also offers other support, including waiving fees, and options to extend the loan term to reduce repayment amounts, as well as the choice to only pay the interest for a period of time. For example if you have a mortgage of $265,000 your monthly payments could be reduced by $600 per month if you temporarily switch to interest only.
The banks will evaluate customers on their individual circumstances, so it’s still up to the lender’s discretion how much help you will receive. This is why it’s important to keep records of anything that has dealt a blow to your household finances, including proof of job loss, underperforming investments, and other debts such as credit cards and car loan bills.
First access a free financial counsellor
If your situation has not yet reached boiling point, don't leave it until you are facing the loss of your home. If you are struggling to make payments and are likely to default on your mortgage payment, now or in the near future, you must contact your lender. Even if your are dreading doing this, it is vital. If there is no communication then your situation may deterioate and eventually result in you losing your home. Repossessed homes are often sold well below their market value. This is a situation you want to avoid at all costs. Because, you may still be left with a debt to your lender even after your house has been sold off.
Contact a financial counsellor as soon as possible. If at all possible ,access one of the free information services. In our debt resources section we have listed a number of free financial services. A line of communication can be set up with your lender to allow you to access any possible hardship variations available.
If you have received a default notice, you need to act immediately. A lender can repossess your house within a very short period. If you are going to contact them yourself and not via a counsellor, be honest and explain what the problem is. Lenders who are members of the approved industry bodies are obliged to explain your options. If there are options for temporary relief or other assistance they will inform you.
There are a number of possible temporary actions, that you may be able to access, like extending the loan, reducing the payments or postponing payments. You may even be able to negotiate with your lender for other changes to your loan. For example, a loan repayment holiday, accessing equity that you have build up in your home, restructuring your loan, or refinancing.
If you have a standard variable rate, you could be paying over the odds. Discounts of up to 0.7% are sometimes available if your loan balance is more than a certain amount.
You may save interest by switching to your lender's basic loan. It probably won't have the bells and whistles or flexibility of a standard variable loan, but it should have a lower interest rate. See our Mortgage course in our learning centre for details of all mortgage types.
Remember that you will need to make these changes before defaulting on a payment as it is difficult to negotiate once you are in default.
Refinancing means switching to another type of loan with your existing lender, or changing to a completely different lender. If you are paying an interest rate or fees that are way above the best on the market, then this is worth considering.
Don't get caught by predatory and unscrupulous refinance brokers. There can be significant costs to leaving your current lender. For example exit fees, legal fees and early repayment fees. The new loan can incur establishment fees and other costs. Weigh it up very carefully before making a decision.
Extending your loan term
Asking your lender to extend the term of your loan from say 25 to 30 years. This can reduce your monthly repayments and take some of the pressure off you. Remember though, your immediate repayments will be reduced but you will pay much more interest in the long run.
Smaller or cheaper home
If you are struggling to make your present mortgage payments, you will need to decide at a pretty early stage whether you can afford to keep your home or whether selling is necessary. Rather than risk losing your home, this may be a much better idea.
It may seem a drastic measure but in some cases it is sensible to sell your current property and move to a more affordable suburb or a smaller property.
If you have enough room you might want to consider renting out a room. This is a good source of income and will help you to meet your loan repayments. Check out the tax consequences first though, as you may have to pay tax on the income. Another option is to fully lease or rent out your property and use the income to repay your mortgage, whilst you live with a relative or friend for a few months.
Whatever you decide is your best plan, it is important that you take action and soon. These situations rarely resolve on their own. Seeking free financial assistance is one of the first steps you can take. This means you will not be alone dealing with your problems and you can benefit from the insight and experience of professionals in this field.