Do things seem to be pretty tight financially? Are you not saving like you used to? Are you eating into your savings and emergency fund to pay the bills each month? Maybe you are at risk of not being able to meet your mortgage repayments?
Even though interest rates are at historic lows you may be feeling that your finances are under increasing pressure.
If so, you are not alone. According to Digital Finance Analytics* currently 21.78% of mortgage holders are experiencing some degree of mortgage stress, which is around 1 in 5 households.
What is causing it?
Basically, over the past year or two increases in our incomes have ground to a halt. This means that what we are earning is not keeping pace with increases in our expenses which have continued to rise.
We have experienced sharp rises in energy bills and insurances in particular. Bills keep coming in and in order to get by we put a bit more on credit and start paying just the minimum and so it starts to creep up.
House prices have also continued to rise steadily. If you have had to buy a new house in the past year or two you would have had to pay more, and in a low interest rate environment, the repayments on a larger mortgage have seemed do-able.
Back in 2010 with the fear of the GFC spurring us on we were saving around 11% of our incomes. This has been trending downwards in the past few years and currently sits at 7.5% according to Digital Finance Analytics.
Diagnosing mortgage stress
Mortgage stress is a bit like a medical condition – initially, most people hope it’s a temporary thing, but eventually they realise they have a real problem that is not going to go away.
So what is it and how do I know if I have it?
An outdated definition of mortgage stress used by government organisations is if your mortgage repayments are 30% of what you earn you are considered to be in mortgage stress. More recently analysts have come up with symptoms around what you are experiencing which take into consideration all your financial situation not just your income and mortgage payments.
Check out these definitions from Digital Financial Analytics* and see which one most closely matches your situation.
Mild mortgage stress is when you are maintaining repayments but have had to re-prioritise expenditure in order to keep up. You are borrowing more on loans and credit cards and cutting back on luxuries and dipping into your savings.
Does this sound familiar?
- Are you currently up to date with your mortgage payments but feel worried about being able to meet them in the future?
- Ensure you have enough money to pay your mortgage by cutting down on luxuries?
- Have you re-prioritised your expenditure to ensure the funds are there when repayments are due?
- Have your credit card balances been creeping up?
Severe mortgage stress is where things are getting serious and you are behind on repayments. You are considering selling or are under pressure from the bank about being forced to sell.
Does this sound like your situation?
- Are you currently behind on your mortgage payments?
- Have you sought help to refinance your mortgage to make it easier to repay?
- Are you speaking to your lender about alternative repayment options?
- Is your lender threatening to foreclose and sell your property?
- Have you made arrangements with your lender under their customer hardship scheme?
Whether it is mild or severe, coming to the stage where you recognise there is a problem is really important. Nationally incomes are not expected to grow much over the foreseeable future so you can’t just hope that pay increases will solve the problem.
Stress about money can be debilitating. It can impact your life, your relationships and your health, so what can you do to reduce it and gain back control?
What you can do now
- Budget carefully. Now that you have recognised that you are struggling to make ends meet, really keep track of where it all goes and look for areas to cut down. Surveys conducted by Digital Financial Analytics found that less than half of households have a budget. Knowing what you are spending is key, then you can look at it objectively and make decisions to allocate what you earn more effectively.
- Don’t get behind on repayments. Even if you are experiencing difficulty, you need to ensure that it doesn’t impact your credit file. As soon as late payments and defaults are entered on your credit report they take years to come off and can affect your ability to consolidate debt or get finance in the future.
- Make minimum repayments on all debts before you start paying extra on one. When things are tight, focusing on paying the minimum on all debts can help create stability. If you can keep up with this then you can work to a stage where you can start paying extra.
- Pay the one with the highest interest rate first. As soon as you have extra cash, work out which debt is incurring interest at the highest rate and pay extra on it first. Work your way through your debts eliminating those that are costing you the most.
If you are experiencing severe mortgage stress it is no time to bury your head in the sand and hope it will go away. The sooner you start seeking help, the sooner you can be working to get on top of things again.
Where do you go to for help?
- Your lender will be able to outline what hardship arrangements they offer. If you start getting into difficulty, talk to your lender and credit providers early. They are obliged to help in hardship situation. See if they can give you some breathing space to help sort things out.
- Financial counsellor or financial planner.
- Specialist broker. Because there is a mortgage involved a specialist broker can look at your situation and go through what options you have available to you.
It probably won’t just be any broker who will be able to assist. They need to have dealt with situations like this before. They also need to understand what options are out there that may help you. Ask them extensive questions about their expertise. They should be experienced in specialist lending and know lenders that offer different options which are usually outside mainstream lenders. Find out if they regularly deal with these type of lenders.
Here’s what you have to expect as soon as you are experiencing difficulty. Some lenders and brokers may feel that it is just be too hard to work out. They know that the amount of work that they will have to do can be a lot compared to how much they are paid and can mean that they may think it is not worth their time. They might just want to speak to the next person who has a really simple loan that fits the box. You know what they will do instead of just saying they can’t help? They can just try to fob you off or passively hope that you go away. If a lender or broker is not returning calls or taking weeks to come back to you with the simplest request, then maybe you should take the hint and go elsewhere.
There are organisations like Lending Mate™ that I founded, who openly say that it is this type of loan is what they are most interested in. We focus on difficult loan scenarios and situations. It just means that we develop knowledge and relationships with lenders who are in a position to help. You also get skilled at pitching the loan in the right way to get the lender to see the strengths in your situation. We also have relationships with other organisations who can offer assistance as well. Our motivation is really about helping individuals and we give an honest appraisal of the options available.
Just like being diagnosed with a medical condition, if you recognise that you have mortgage stress, either mild or severe, it is time to seek some real help. Mortgage stress does not have to be terminal. However, unless you take action it could wreak havoc with your finances and your life. Reach out to people who can help. Weigh up what is going to be the best course of action to get you back in control.
By Peter Ellis
The Borrowers Advocate, Lending Mate™
Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.
Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.