If you’re getting ready to buy a home, plan ahead to keep your finances under control and avoid mortgage stress.
What is mortgage stress?
Mortgage stress is when your home loan repayments take a serious toll on your finances, stretching your budget to breaking point. Usually this happens when a big portion of your income is directed towards your mortgage, leaving little for everyday expenses like groceries, bills and entertainment. Rising interest rates, unexpected costs like car repairs, a medical emergency, or a drop in income can compound this stress even further.
Some common signs of mortgage stress include:
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living paycheck to paycheck
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regularly dipping into your savings or relying on credit cards to get by
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difficulty budgeting for unexpected repairs or medical bills
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mortgage repayments making up more than 30% of your pre-tax income.
While 30% isn’t a hard-and-fast rule, it’s a handy benchmark to keep in mind as a flag for when housing costs may be putting strain on your budget.
How to avoid mortgage stress
When you’re new to the housing market, avoiding mortgage stress can seem overwhelming. The good news is, with the right plan of action, you can keep your finances balanced and your stress levels in check. We highlight some of the key steps you can take before applying for a home loan to help prevent the possibility of mortgage stress.
Borrow within your means
When you apply for a mortgage, it’s tempting to opt for the biggest loan your lender is willing to offer. But just because you can borrow that amount, doesn’t mean you should. Ideally, aim for an amount that leaves enough in your monthly budget for fixed costs such as groceries and bills, as well as the occasional spend on entertainment, dining out and travel. It’s important to track expenses and above all, be realistic about what you can comfortably afford, not just today, but also in the future.
Use a borrowing power calculator to estimate how much you can afford and what your repayments might be for any potential interest rate rises.
Build an emergency fund
Life is full of surprises, and sometimes these surprises are expensive. This is when a financial buffer or emergency fund with about three to six months of living expenses saved can make a huge difference. Emergency funds are helpful because they offer you room to breathe in case unexpected costs come up or your income unexpectedly reduces. Remember to start small and build up your emergency fund over time, treating it as a safety net for your mortgage and everyday budget.
Avoid taking on other debts
When you’re planning to take on a debt as large as a home loan, having other debts may fast–track your financial stress. That’s why it’s crucial to keep car loans, credit cards and personal loans in check. The less you owe elsewhere, the more you can focus on your mortgage without feeling like you’re stretched too thin.
Get good at budgeting
A solid budget is your best friend and will help you avoid mortgage stress. Make a habit of tracking your income and expenses to see where you’re spending and where you can cut back. Also remember to factor in the upfront and ongoing costs of homeownership like insurance, maintenance and rates, so there are no nasty surprises along the way. Use a budget planner to help you save.
Plan for interest rate changes
If you’re planning to choose a variable rate home loan, it’s important to be mindful that even the smallest of interest rate rises can increase your home loan repayments. A good tip is to budget for repayments that are slightly higher than your current rate. That way you’re covered if rates rise and have extra cash in your budget if they stay low.
Consider fixed rates or offset accounts
To avoid the unpredictability of rate rises, a fixed rate home loan can offer more peace of mind by locking your repayment costs for a set period. Alternatively, if you are considering a variable rate home loan, getting an offset facility with your loan account can reduce the amount of interest you’ll pay over the life of your loan, helping you save substantially. You can also split your loan and take advantage of both types of rates.
Regularly review your loan
Don’t set and forget your mortgage. Check the latest interest rates every year or so to see if there’s a better deal available. Refinancing to a lower interest rate with better loan features can potentially save you a lot of money and make managing repayments easier.
What to do if you experience mortgage stress?
Don’t wait until the situation escalates into a full-blown crisis. Most lenders will be willing to work with you if you’re upfront about your situation. If you’re a home loan customer and are facing difficulty making repayments, we can support you to discuss your options and find a solution. While it can feel overwhelming in the short term, financial difficulty can be managed.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/home-property/buy-first-home/avoid-mortgage-stress
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