While a home loan is considered ‘good debt’, it certainly doesn’t feel ‘good’ when you find yourself unable to meet your monthly repayments.
Whether brought on by the impact of COVID-19 and lockdowns, losing your job, divorce, illness or simply bad budgeting, mortgage stress can have a huge impact on your state of mind – including anxiety, panic and depression.
This can have repercussions on your relationships. It can also lead to poor decisions, such as taking out high-interest credits cards to cover the shortfall. While this may provide immediate relief, it can lead to bigger problems down the track.
The good news is, if you’re currently struggling to pay your mortgage and finding yourself falling into this mortgage stress spiral, you can take back control by taking action. The sooner you seek help, the more options you’ll have.
Mortgage stress is on the rise
Mortgage stress is often defined as when a household is spending more than 30 per cent of their gross (pre-tax) income on mortgage repayments.
However, it’s perhaps better summed up as when the money coming in isn’t enough to cover the cost of your mortgage and other expenses.
According to recent Roy Morgan research, one in six mortgage holders (approximately 677,000 people) in Australia were ‘at risk’ or ‘extremely at risk’ of mortgage stress in the three months leading up to May 2021.
In addition, a survey by the University of NSW suggests that the proportion of households in financial stress has climbed to 42 per cent thanks to soaring house prices and mortgages. So, if you are struggling right now, you’re not alone.
But while it’s comforting to know that others are in the same boat, it’s even more comforting to know that there are several options out there to relieve the strain.
Contact your lender
The first and most important thing to do if you’re struggling to pay your mortgage is to reach out to your bank or home loan lender to explain your situation.
All mortgage providers in Australia, including the big four banks – Westpac, NAB, Commonwealth and ANZ – have specialist hardship teams who are there to help you in tough times.
Not only are they trained to be understanding of your situation, but they must consider a hardship variation request under Section 72 of the National Consumer Credit Code on the grounds of financial hardship.
Hardship variations and how to apply
So what are hardship variations? Hardship variations are changes made to the term of your loan to make it easier to manage and ease the financial strain.
If you took out your mortgage after March 2013, you can apply for a hardship variation, whatever the value of your loan.
If you took out your mortgage before that date, other rules apply – see the Australia Securities and Investments Commission (ASIC) website for more information.
Here are some of the hardship variations you can negotiate:
- Extending your loan term
By extending the term of your mortgage, for example, from 20 to 30 years, your monthly payment amounts will reduce as they are spread out over a longer period. This can be helpful in the short term but bear in mind that you will pay more over the extended period in interest.
- Frozen repayments
Freezing your mortgage repayments, also known as a mortgage holiday, means you don’t make payments for an agreed period of time, relieving the stress. Again, this is good in the short term but interest will accrue leading to larger monthly payments when you start paying again.
- Freezing interest
Freezing your interest means you don’t pay interest for several months, reducing payments so they’re more manageable. Just bear in mind that a lender is not required to do this under the Code and may not consider it.
- Access money in redraw
Accessing money in redraw allows you to access any additional repayments that you’ve made on your home loan above minimum payments to cover repayments. However, any benefits you enjoy in reduced interest thanks to redraw will decrease.
- Adding overdue payments to the balance of your loan
This involves putting your late payments back into your loan, so that you’re no longer in arrears and being charged late fees. This will put you in a better position in the short term, though will increase interest long-term.
- Partial repayments
Partial repayments mean you make reduced monthly repayments. This can take the pressure off a little. But bear in mind that you’ll still pay full interest despite only making partial repayments.
- Waiving fees and charges
This includes waiving ongoing fees and charges attached to your home loan, such as monthly service fees, annual fees and late payment fees. However, lenders are under no obligation to agree to this.
Acceptance or decline
When you reach out to your bank or lender for a hardship variation, make sure you’re prepared. You’ll need to explain your financial hardships, including how long you think you will struggle to pay and how much you can afford to repay a month.
If your lender agrees to your application for a hardship variation, make sure you do all you can to meet the new term and get back to a good financial position. This includes going over your budget. You can use our handy budget calculator to help.
If they refuse your request, they must give you a reason. If you can’t reach an agreement, you can take it to the Australian Financial Complaints Authority (AFCA) to make a complaint and get free, independent dispute resolution.
Refinance and consolidate your debts
Refinancing or consolidating debts can be another avenue to explore if you’re struggling to make your monthly mortgage payments.
Refinancing involves paying out your existing home loan with a new one with better interest rates, terms and fees. Doing this can allow you to reduce your repayments to an affordable level.
You could even consider consolidating other loans, such as car loans and credit cards, into the new mortgage to reduce monthly outgoings further and cut down on high interest and fees. This can also make managing your repayments easier.
Just be aware that not all lenders will accept an application if you have late mortgage payments or you’re in a tumultuous financial position. Your best bet is to speak to a specialist mortgage broker who can explore options for you.
Consider selling your home
While it may be a tough decision, selling your home is another option if you’re struggling to pay your mortgage.
By selling, your home loan will hopefully be paid off, and you can either choose to rent or look to buy a cheaper property with a more manageable size mortgage. You may even have equity in it to use to your advantage.
This should only really be considered an option if you’re in a situation where your financial struggles are likely to continue over the long term, such as unemployment or an illness that will restrict your ability to work.
If your financial struggles are shorter-term, for example, due to unexpected expenses or COVID-19 lockdowns, you’ll be better off exploring the other options available from banks and lenders.
Whatever route suits your struggles best, we recommend dealing with the situation quickly, rather than avoiding it and hoping it will go away. The longer you let mortgage stress linger, the worse you and your finances will be.
Worse case, you may be issued with a default notice, which could lead to you ending up in court or having your home repossessed if you don't pay up.
So take action, take back control and don’t be afraid to ask for help if you need it, both financial and emotional.