10 steps to reduce mortgage stress

September 22, 2020

young family dealing with mortgage stress

During the unforeseen COVID-19 pandemic, the federal government and banking sector have thrown every possibility they can to homeowners during this difficult time to prevent widespread mortgage stress across the community.

As the six-month home loan deferral periods are coming to an end, its likely some borrowers whose livelihoods have been affected by the pandemic economic shutdown still won’t be able to meet their repayments.

If you’re worried about your home loan right now due to the pandemic, there are things you can do to relieve your stress and keep your home. If you’re about to buy your first home, it is also important to establish good habits immediately when you take out the loan to make the process of home ownership as easy as it can be.

Fortunately, good planning and budgeting will go a long way towards helping you avoid mortgage stress. As will the 10 tips below. 

There are many different home loans out there and most are packages that included added features like credit cards and transaction accounts. Opting for a package with a good interest rate and repayment term loan is all you might be looking for. Before you opt for a package, ask yourself if you really need the additional features that make up the package and read the loan documents fine print closely before agreeing to anything. You don’t want to get stuck paying for something you don’t need.

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Whenever you receive your tax refund, or a bonus from work, maybe even an inheritance, it is easy to be tempted to treat yourself to a holiday or spoil yourself. However, you could consider making a lump sum payment towards your mortgage. The less you owe, the less interest you have to pay. If you are in the position to even increase your monthly repayments by $50 for example, it helps you get ahead where you can and helps eliminate mortgage stress in the future.

When dealing with mortgage stress, the first thing people think of is usually reducing their expenses or finding a cheaper home loan rate, but a way to eliminate getting caught up in that cycle is to look for ways to lift their income. Whether it is getting a promotion at work, or starting that side business, selling those items around the house you don’t use or studying to get that extra qualification. Do whatever you can to look for ways to increase your income as this will alleviate that mortgage stress.

A common mortgage stressor is when something unexpected may happen to your health and you no longer can’t work due to an injury or illness. The last thing you want to worry about is paying off your mortgage if you get cancer, have a stroke or are in a car crash. To avoid these stressors, put in safeguards like life, trauma, TPD and income protection insurance in place so you’re protected in the event that you suffer a catastrophe.

The home owning dream is usually to buy a big family home at the expense of creating wealth outside this asset. This means they can’t build an investment portfolio to supplement and replace their income when they retire. It is also an option to buy a smaller family home and then also invest in other properties or a share portfolio than just own one big family home which would require all your income. This way from the other properties the income you earn from renters will be used to pay those mortgages off.

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This will give you the peace of mind so that if you lose your job, you know you have the mortgage covered for a period of time. By placing it in an account where you might lose any interest if you withdraw, or in an account that you don’t use will help you accumulate that total if need be and not use it. Putting this money in an offset or redraw account is another choice as it can also reduce the interest you pay and help you pay off the mortgage faster.

When purchasing your first home, it is common for most people to end up buying new furniture and renovating parts of the house, incurring unnecessary moving expenses and even buying a new car. All these added expenses can contribute to mortgage stress down the track. You don’t want your disposable income available for repayments taking a hit if you increase liabilities that were not there before taking out the mortgage. Most brokers will advise their customers to avoid jumping into more debt just because they can and to give themselves 12 months to get used to making the repayments. You can also get ahead by making additional payments or increase your savings before taking on any more debt. You would rather not accept a loan that you can’t repay without stress.

An offset account is a transactional savings account which is linked to your mortgage. Opening an offset account could be another way for you to reduce your mortgage stress. A mortgage offset account allows you to offset, or reduce the interest charged on your home loan and this will reduce the amount of interest you pay and help you pay off your mortgage faster. This particular account will reduce your monthly repayments by offsetting your account balance against the balance of your home loan. The more money you have in an offset account, the bigger the savings and the faster you can pay off your mortgage. If your offset balance is always low, it might not be worth paying for this feature. Home loans that offer an offset account facility may often charge higher interest rates with hidden fees, so make sure to read your contract.

A budgeting tool is used to help track your spending and track your net income. It could cover all areas of your house, utilities, food, pet care, gym memberships etc. Chances are you might struggle to accurately estimate how much you spend unless you’ve closely tracked your spending in the past. To accurately start of your budget, start with the past three months and entering everything you’ve spent on into a spreadsheet. Then categorise this spending so that you can see what you’re spending your money on. This will also allow you to analyse where you can stop spending excessively if you do. In another spreadsheet, draw up a budget that would allow you to comfortably pay off your mortgage and save a minimum of 10% to 20% of your salary for emergencies. Compare the two spreadsheets and see if you can make cutbacks wherever is ideal.

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This may sound very logical but however, the most effective way to avoid mortgage stress is by buying a home that you will find easy to pay off, rather than stretching for a home that’s just on the edge on the cliff of affordability. This way you will still have enough cash to service your monthly repayments if you lose your job or something catastrophic happens.

Words by Ece Demir


Written by Refinancing.com.au

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