Mortgage stress

Despite sustained, record low interest rates, repaying a mortgage remains one of the most significant financial stressors for many Australians.

According to Moody’s Analytics, 20 percent of all Australian households are said to be under mortgage stress in Australia.

Government figures record just over a third of Australian households has a mortgage.

Considering the size of those mortgages, it’s hardly a surprise that the debt stresses us out.

ABS data shows the average mortgage across Australia is $728,500.

In NSW, it is $939,700 and in Victoria, it is $785,000.

Types of mortgage stress

At this point, it is important to define mortgage stress.

Mortgage stress is a technical term describing spending more than 30 percent of income on mortgage repayments.

That is the type of mortgage stress Moody’s refers to above.

However, another type of mortgage stress goes along with the technical definition and is real and consistently impactful on people.

This is the mental and emotional pressure of financial stress caused by being fearful, even panicking, about what might happen if your household could no longer afford the current mortgage repayments.

Why does mortgage stress happen

In short, the size of mortgage debts – for many Australians, it is the most significant loan they will ever repay.

When households are squeezed into paying over 30 percent of income towards meeting mortgage repayments at a low-interest rate, even the merest hint of a change in interest rates causes physical and emotional stress.

Don’t forget how the emotional significance of owning a home – and the fear for some of losing one – it’s a heavy burden for a lot of hardworking Australians.

As interest rates have remained low, mortgagees have become used to their repayment levels, meaning any increase in interest rates will only exacerbate mortgage stress.

“I think what is important though to realise that whilst most people are currently coping with their mortgage repayments, there is still a lot of anxiety about the future with regards to possible interest rate rises, security of employment and property prices becoming unaffordable or property prices going backwards in the future,” said Hamish Ferguson, Director of Vision Property and Finance.

How can we reduce mortgage stress

There are several successful methods of reducing mortgage stress. They include:

  1. Ensuring you are paying extra on your mortgage to build up a safety net or buffer which can be used when interest rates rise;
  2. Fix your loan if you are worried about rates going up and only have a small weekly surplus to your budget. This way, you won’t have to concern yourself with increased repayments for the time frame you have fixed for; and
  3. Review your expenses. Often when we are stressed, our level of comfort spending increases. We need to be aware of this and monitor our spending on those items that we tend to purchase when we are stressed. Eating out, TV subscriptions, buying gifts for ourselves or others, and upgrading items such as mobile phones, TVs, cars, and fashion.

How can we stop mortgage stress derailing our finances and relationships

What if we can’t eliminate our mortgage stress. How do we stop it from taking a heavy toll on our lives?

Perspective is so important. If we focus on the negative, on the difficulty of financial strain, then our relationships with money will remain challenging.

An example might be rather than saying ‘I don’t have enough money’. Instead, try to say, ‘well, at least I am still able to meet my commitments.

When it comes to relationships and money, transparency and openness are essential.

We can’t stress enough how important it is to ensure you are communicating with your partner and family and not bottling up worries and problems.

Being mindful of money goes hand in hand with good communication.

As we touched on, so much of the mortgage stress equation is about acceptable margins. Small changes – either way – in interest rates can have a significant impact.

The Australian dream holds big financial risks, so mindfulness is essential

It’s said that the American dream is upward mobility – the ultimate example being to become the US President.

The Australian dream seems more modest – home ownership, especially the good-old quarter acre block.

But arguably it comes with bigger risks than the American dream, especially for Australians in capital cities.

With interest rates at record lows and house prices surging, home ownership seems like the golden ticket for many, given the promise of appreciation that seems like it could go on forever.

But realistically, home ownership is unaffordable for an increasing number of Australian first-time home buyers, especially those in major cities on average salaries.

The fact remains ‘the Australian dream’ means many people who cannot – or barely can – afford property keep reaching for it and opening themselves up to chronic financial stress.

Who wants to give up on a dream though, right?

The problem is most pronounced in Australia’s biggest city – Sydney – where the median Sydney house price is sitting at $1,112,671, Melbourne $859,097 according to Corelogic.

To be able to afford the repayments after making a 20 per cent deposit, a Sydney household needs to earn at least $147,629 a year, 9News reported.

If that household wants to avoid living in mortgage stress – and have the relative luxury of a buffer against interest rate changes – its annual salary would need to be at least $177,155.

Mortgage stress is classified as anything above spending 30 per cent of your pre-tax income on household repayments.

According to the salary tracking website, Payscale, the average annual salary in Sydney is $76,000 – meaning the combined income even two adults earning that would fall short of avoiding financial stress.

In Victoria, it’s $70,000, it’s $71,000 in the Australian Capital Territory, while in Queensland it’s $66,000 and in Western Australia, it’s $73,000.

Because property prices are highest in New South Wales, Victoria and the ACT, anyone considering buying a home in those States, need to be on a six-figure salary to have any realistic hope of entering the property market.

9News reported 41.1 per cent of households across Australia are in financial stress despite the lower interest rate environment.

In NSW, 44.19 per cent of households were in financial stress and 37.66 per cent of households reported being in mortgage stress, and property is only getting more expensive.

Recently the ANZ bank predicted property prices in Sydney and Melbourne could surge a further 19 per cent and 16 per cent respectively before slowing in a year’s time.

So, what’s the answer? We are not saying avoid home ownership – but to be aware of what you can and cannot afford.

Mindfulness can be part of the solution to financial stress and avoiding it from taking hold.

A clarification is needed though. Mindfulness is not a solution to loan repayments that are just too high to sustain – if that is happening, we’d suggest getting honest with your bank and urgently and seeing what can be done.

But a mindful approach to money can help those who need to avoid unhealthy habits with money to maintain repayments.

Perhaps most importantly, becoming financially mindful will help people avoid entering contractual situations they really should not be in.