How the mortgage stress test impacts Australians

Updated November 20, 2024

Have you ever heard about mortgage stress in Australia? It happens when a household is spending too much of their income on loan repayments for their properties. Mortgage stress is becoming more common as families struggle to afford their monthly mortgage payments. They borrow money to cover the costs and become neck-deep in debt.

Many Australian homeowners also worry a lot about their financial situation, and this is a telltale indication of mortgage stress. In this article, Mortgage Professional Australia will further discuss the definition of mortgage stress, how it affects Australian homeowners, and what they can do about it.

For mortgage professionals, share this with your clients to help them realise and understand their situation. This is especially true if you think that they are facing mortgage stress but are not aware of it.

What is mortgage stress in Australia?

Mortgage stress, a term commonly used by property experts and economists, occurs when homeowners struggle to make their mortgage repayments. There are two different kinds of mortgage stress: one conventional, the other psychosomatic.

Conventional mortgage stress

Conventionally, mortgage stress occurs when obligations for interest repayment take up too much of a household’s budget. That threshold is typically between 30% and 35% of gross income. Beyond that, concerns grow due to other household financial obligations. Therefore, while there is no fixed definition of mortgage stress, it usually refers to homeowners who pay more than 35% of their gross household income on their mortgage.

One reason why the definition for mortgage stress is not set in stone is that the mortgage holder may be able to increase their income and therefore alleviate the stress. Likewise, if the owner is ahead on mortgage repayments, there is a bit more room to offset any increase in interest obligations.

Psychosomatic mortgage stress

On the other hand, there is psychosomatic mortgage stress when the mortgage holder is afraid of the effect unknown interest rate rises may have on the household budget. This type of mortgage stress may cause the household to spend less in other areas in anticipation of mortgage interest payment increases.

How many people in Australia are in mortgage stress?

There are currently 1.63 million Australians dealing with mortgage stress, according to Roy Morgan Research. The findings categorise Australian homeowners into two: At Risk and Extremely at Risk.

Australians who are both “At Risk” and “Extremely at Risk” of mortgage stress are those who pay more than the specified percentage of their after-tax household income for their mortgage dues. Depending on their salary and expenses, it can be 25% up to 45%. This is based on the Standard Variable Rate by the Reserve Bank of Australia (RBA).

Who is affected by mortgage stress?

About 31.4% of mortgage holders in Australia are considered at risk of missing repayments or struggling to make payments as interest rates increase. While interest rates are a major factor that can impact a homeowner’s mortgage stress, the variable that has the biggest impact is household income, which is connected to employment.

If levels of employment remain high, the number of mortgage holders at risk of mortgage stress will still be nowhere near the peak of the 2008 Global Financial Crisis. At that time, nearly 36% were at risk.

What are the signs of mortgage stress in Australia?

Beyond the numerical definition of mortgage stress, there are other signs of this phenomenon. One of these is if you no longer have the money to afford luxuries (i.e., non-essentials such as eating at restaurants, going to the movies, or ordering food for delivery). Another sign of mortgage stress would be avoiding social activities that cost money, either for yourself or for your kids, if you have any.

Living from paycheque to paycheque is another one. You are most likely unable to come up with the money to pay for unexpected expenses like car repair fees or medical bills. Other obvious signs of having mortgage stress are:

• relying on family or friends for financial help
• unable to stop using credit cards since it’s your only option
• taking out numerous personal loans from the bank in a short period

How do mortgage brokers view mortgage stress?

Some mortgage brokers see it less as mortgage stress than “cost-of-living stress,” or combined pressure. Banks stress test their customers to 3% above the interest rate at the time of the loan application, meaning mortgage holders have their income assessed as being able to handle rate increases.

Difficulty in budgeting disposable income as well as increases in costs for necessities like electricity, groceries, and fuel are combining to add pressure to mortgage holders. These challenges have led brokers to encourage their clients to buy below their means or hold off on their dream of homeownership. Mortgage brokers also advise their clients to look for other options like finding a home in an area that is more affordable for their financial situation.

Choosing to rent instead of buying property can be beneficial while managing one’s finances. Brokers can assess their clients’ financial capacity and their suggestions can help avoid mortgage stress in the long run.

How to deal with mortgage stress in Australia

The first thing that you need to solve in dealing with mortgage stress in Australia is how do you avoid it. You can take precautions like researching the country’s mortgage sector before making a decision and seeking advice from mortgage and real estate professionals before entering the property market as a buyer. But if you find yourself already dealing with mortgage stress, there are still ways to take control of your finances.

How can I stop stressing about my mortgage?

Below are some practices that can help you stop stressing about your mortgage:

Review your budget regularly

It is helpful to take a closer look at your finances in a specified timeline. For example, you can review your expenses daily while you manage your income per month. Also examine your bills and mortgage repayments if you are paying them on time. Try to identify areas where you can cut back on your spending and create ways to thrift when needed to ease your financial worries.

Communicate with your mortgage lender

You can always communicate with your mortgage lender if you find it difficult to make your mortgage repayments. Many mortgage companies are willing to work with their clients to find solutions, such as:

• switching to a cheaper option for your mortgage
• restructuring the mortgage and its stipulations
• helping you with remortgaging
• providing other temporary relief

Explore refinancing options

If you have a mortgage broker, ask them if they can decrease your interest rate or monthly payments with the lender. You can also request to refinance your mortgage. This means getting a new loan aside from your current one or replacing it altogether. Refinancing is usually done to acquire benefits such as lower mortgage fees, lower interest rates, and better repayment terms.

Build an emergency fund

As stated above, a sign of having mortgage stress is when you are experiencing a paycheque-to-paycheque lifestyle and barely making ends meet. As such, try to prioritise saving immediately after your financial situation gets better. Make an effort to build up an emergency fund that can help you handle unexpected expenses or temporary income disruptions.

Explore government assistance programs

Another way to stop worrying about your mortgage is to check if you qualify for any government programs designed to support homeowners. For example, the Australian government launched the Home Guarantee Scheme (HGS), an initiative created to help Australians buy a home more easily.

Housing Australia administers the HGS on behalf of the Australian Government. It also includes three types of guarantees: 

• First Home Guarantee (FHBG). This is for first-time homebuyers. They can purchase a property more easily with a minimum deposit of 5%.
• Regional First Home Buyer Guarantee (RFHBG). This is for those who want to buy a home in regional areas. The deposit can also be as little as 5%.
• Family Home Guarantee (FHG). This is for single parents and single legal guardians who have at least one dependent and want to be homeowners. The deposit can go as low as 2%.

Look for other sources of income

If you only have one source of income, it can be challenging to meet your expenses, pay your bills, and deal with your mortgage dues. That’s why you might want to take on a side job or freelance work to aid your primary source of income. The goal is to expand your income streams.

Managing your schedule to accommodate a supplementary job can be difficult at first. But once your income exceeds your expenses, it will help you feel more in control of your mortgage payments.

Practice stress management techniques

Practicing stress management techniques is hard if you think about your financial situation all the time. To counter this, try to engage in activities that bring you peace and help you think clearly. These can be new hobbies, exercise, meditation, and spending time with friends and family. Taking care of your mental and physical well-being can create a positive impact on your ability to manage mortgage stress.

To further help you deal with your financial situation, watch this video about the four steps to easing mortgage stress in Australia:

Mitigating mortgage stress for Australians

Mortgage stress is a common challenge for many Australians. Not all hope is lost, however, since its impact can be minimised by the above-mentioned tips and being a responsible borrower. This means paying your dues on time and if possible, in full.

Another key to mitigating mortgage stress is creating better strategies in your financial management such as carefully planning your budget and only applying for loans within your budget. Also, it pays to engage the services of professionals who can help with your mortgage transactions. This is why hiring a mortgage broker should be a priority if you want to lessen your frustrations and worries.

With the right mortgage agent, Australians can still have peace of mind in their journey towards homeownership despite its complications. See our awards for the best mortgage brokers and companies to find the right mortgage professionals for your needs.

By being updated with the latest mortgage rates and best mortgage companies, one can minimise the challenges associated with mortgage stress. Seeking assistance when needed will also ensure a more secure and comfortable financial future for homeowners.

Have you ever been affected by mortgage stress in Australia? How was it? Let us hear your story in the comments below