You might be comfortable paying off your mortgage now, but what if things change? Here are some tips on how to avoid a mortgage stress fracture.
Paying off a mortgage is one of the biggest financial challenges you and your family will ever tackle.
And it isn’t easy – mortgage repayments take up about one-quarter of a family’s income on average, according to the Australian Bureau of Statistics’ 2016 Census.
While most families manage, what happens if your circumstances change?
An unexpected redundancy, relationship breakdown, illness or accident can dramatically impact your ability to make your payments and put you in mortgage stress.
But first, what is mortgage stress?
While there isn’t a technical definition for the term, mortgage stress is generally considered to occur when a person or family is spending 30% or more of their income on home loan repayments.
There are also a range of other criteria which would suggest you’re experience mortgage stress.
If you’re paying only the interest on your home loan, borrowing money from family, or having difficulty paying your bills, then you might be experiencing mortgage stress.
I don’t have a problem now, why worry?
It’s unwise to assume your circumstances will never change. An accident or illness can befall a person at any time, and the impact on your finances can be devastating.
An increase in interest rates can also have a significant impact on your mortgage repayments. A simple 0.25% rate hike can increase repayments on the average Australian loan ($375,000) by about $50 a month.
Over the course of a year – and with a potential of further rate hikes – this can really chew into your disposable income.
Ok, so how can I avoid it?
The smart borrower won’t wait for their circumstances to change, they’ll start planning now to make sure they can weather a storm if it hits.
Steps you can take to reduce your risk include:
Step 1: Use a mortgage calculator to see what your repayments would will look like if there was a rate increase. Would you be able to keep up?
Step 2: Review your current income and expenses, and make a new family budget. Use it to track where your money is going and where savings can be made, so you can either pay off your mortgage sooner or get by if things go awry.
Step 3: If you’re worried about your mortgage, or concerned about the impact of a future rate hike, give us a call.
We can talk to you about your situation and help you make a plan to ensure a small problem doesn’t become a big one.