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Mortgage stress occurs when property owners struggle to meet their mortgage repayments, leading to financial strain and potential consequences. With 12 interest rate rises since May 2022, many investors are feeling the pinch.
What is mortgage stress?
Mortgage stress refers to a situation where property owners find it difficult to meet their mortgage repayments due to financial constraints. Mortgage stress is commonly defined as when a household is spending more than 30% of its pre-tax income on mortgage repayments. It can arise from a variety of factors such as rising interest rates, changes in personal circumstances, unexpected expenses, or inadequate budgeting. When borrowers experience mortgage stress, it can have significant repercussions on their financial well-being, leading to financial strain, and potential defaults on the loan.
How to avoid mortgage stress
Stress-test your mortgage
It's important to stress-test your mortgage against potential interest rate rises. While interest rates may be low when you secure your loan, they can fluctuate over time. Calculate how your repayments would be affected if interest rates were to increase by 1-2%. This exercise will give you a better understanding of your mortgage affordability and help you prepare for future rate hikes.
Build a cash reserve
Maintaining a cash reserve is essential to handle unforeseen circumstances. Aim to set aside a contingency fund that can cover at least three to six months of mortgage repayments. This reserve will act as a safety net during times of financial strain, job loss, or unexpected expenses.
Regularly review your finances
Financial circumstances can change over time, so it's vital to review your finances regularly. Keep an eye on your income, expenses, and interest rates. If you anticipate challenges in meeting your mortgage repayments, consider seeking professional advice to explore available options, such as refinancing or restructuring your loan.
Consider offloading properties
If you have multiple investment properties you may want to consider offloading underperforming assets to ease the pressure of rate rises. According to CoreLogic data, more than 5,000 investment properties were listed for sale in the past three months, lifting the nationwide tally to 10,542 data from CoreLogic shows.
Consider refinancing to a more competitive interest rate
While home loan interest rates are rising across the board, there are still competitive deals to be found. We have some of the lowest rates on investor loans in the market, starting from 5.99% p.a. (6.71% p.a. comparison rate) on our Smart Booster Investor Bundle, which allows you to bundle your investment loan with your home loan on your owner-occupied property. With no monthly or ongoing fees, you could save thousands.
