The COVID-19 pandemic has sent shockwaves through the Australian economy. As businesses and the community strive to cope with the ‘new normal’ of rules such as social distancing and travel restrictions, many people have found themselves with reduced work hours and pay, or have suddenly lost their jobs. This is having a marked impact on household finances.
Mortgage stress is when a household finds it difficult to pay their bills and also cover their home loan repayments. The extent that the nation’s homeowners are currently experiencing mortgage stress is perhaps expressed in the large number of people asking for help. According to the Australian Banking Association (ABA), one in 14 mortgages have been granted a repayment pause due to the current economic conditions (as of 16 May, 2020). That’s nearly 430,000 home loans on a repayment holiday.
The Macquarie Dictionary defines the term as “the stress on household finances caused by an increase in mortgage repayments”; however, it is generally understood to be caused by an uncomfortable change to the ratio of income to loan repayments. While there seems to be little consensus in financial circles on how to measure mortgage stress, a frequently used generalised measure is that it happens when a household with relatively low income spends 30% or more of its pre-tax income on home loan repayments. The Australian Bureau of Statistics, for example, has used this benchmark.
Other research organisations use different measures to define mortgage stress:
- Roy Morgan conducted a survey which found that “828,000 mortgage holders (18.2%) were in ‘mortgage stress’ as Australia entered shutdown in March”. The company states: “This figure is determined using a complex formula that takes into account household income, costs, and mortgage repayments.”
- According to Digital Finance Analytics and The Australian Financial Review (AFR), the number of Australians in mortgage stress “rose to 38.8% during April, up from 37.2% in March”, to 1.41 million households which were “at risk of losing their home”. However, the AFR states that “Digital Finance Analytics defines households, whether mortgage-holders or renters, as being in housing stress when their income is less than their overall expenses.”
How do you know if you are in mortgage stress?
Mortgage stress means that a homeowner is finding it financially tough to meet their mortgage repayments. It’s typically the step before a mortgage arrears or default – which means the homeowner has missed a payment or a series of payments.
One way that could help you work out if you could be at risk of mortgage stress is to do a simple calculation to find out if your mortgage repayments are more than 30% of your combined household income. It could also be a good idea to see what happens, in those calculations, if income is reduced or the interest rate on your loan was to rise.
The Australian Housing and Urban Research Institute (AHURI) says working out if you are in mortgage stress is a bit more complicated than the 30% mortgage-to-income ratio implies. The Institute argues that it does not take into account some benefits of paying more into a home loan, nor does it work for all income levels.
“For example, a high income household may choose to spend significantly more than 30 per cent of household income to improve their housing aspirations but due to their high income they still have more than sufficient money after housing costs to pay for adequate food, health, education and recreation costs for the members of the household,” the AHURI states.
Another way to see if you could be at risk of mortgage stress is to use Canstar’s Budget Planner Calculator. You can experiment with varying levels of income and expenses to help see at what point you could find it hard to balance the budget.
What can I do if I am in mortgage stress?
If you are in financial strife, consider taking advantage of the free financial counselling services available in every state. You could consider calling the National Debt Helpline on 1800 007 007, or the Financial Counselling Australia website has a “Find a financial counsellor” map which can help you find financial counsellors around Australia.
> Related story: How financial counsellors can help Australians in difficulty
If you are in mortgage stress, it could be a wise idea to talk to your lender. Right now, many lenders are offering temporary repayment relief to eligible customers who are experiencing financial hardship due to the COVID-19 pandemic. They might also be able to suggest other ways to make loan repayments more manageable, even if it is a temporary change, such as:
- Reducing repayments to the minimum amount: As interest rates have fallen recently, it could be possible to reduce your repayment amount, or to change the frequency of payments. Speak to your lender.
- Access excess funds in the home loan: If you have an offset account, it could be possible to use these extra funds for repayments. However, this could increase the term of your loan and the amount of interest you may have to pay. If you have a redraw facility, it could be possible to withdraw some funds to cover repayments. Check the conditions of your loan. If you are applying for a repayment holiday, some lenders could restrict access to this redraw amount. Check with your lender.
- Swapping to interest-only repayments: It could be a good idea to find out if there are any fees and charges related to this, although some banks have announced they will be waiving fees for this kind of loan change.
- Stay with lender, but restructure loan: Other options could include staying with a principal-and-interest loan, but restructuring it, such as by moving from a variable to a fixed rate, or switching to a split variable/fixed arrangement. Some banks on Canstar’s home loans database are changing or waiving their fees for loan restructuring, however, it could pay to check what fees and charges may apply to loan changes.
- Refinance with a new lender: Another option could be to refinance – to look for a different lender with better COVID-19 packages and/or a more competitive interest rate. Canstar finance expert Steve Mickenbecker said interest rates were extremely competitive at present, with rates “hovering around the 2% mark” in many cases. However, he said, “If you have already been retrenched, or think you are likely to be, consider carefully if you want to refinance” as “it could be more difficult to be approved.” It is important to keep in mind there could be fees and charges associated with refinancing with another bank. There could also be break fees charged by your bank if you want to swap lenders. You may want to consider all possible costs, as well as any benefits of refinancing, before making a decision.
→ More information: I can’t pay my mortgage: What can I do?