The termhas been bandied around in the news recently. With Reserve Bank of Australia (RBA) cash rate at a record low of 1.5 per cent, house prices continuing to rise and incomes remaining flat, economists are concerned that when rates do increase, many Australians will experience mortgage stress.
There are many definitions of what mortgage stress is. The general consensus is that households experience mortgage stress when mortgage repayments are more than 30 per cent of the household income. According to 2016 Census data, the majority of two-income households earn enough to avoid mortgage stress, although this may change when rates do increase.
While no-one can predict exactly what will happen in the future, there are ways we can avoid, or at least manage mortgage stress when rates do increase.
Buy what you can afford
It can be tempting to stretch your budget to buy the home of your dreams. While the stretch may be possible at the moment, will it be sustainable if conditions change in the future? Will you still be able to make repayments if rates go up? What happens if you lose your job? Being realistic about what you can afford now, but also in the future, means you are less likely to experience mortgage stress.
It may be a case of buying in a less expensive suburb, buying an apartment rather than a stand alone, or buying a property that needs a bit of work. Avoid the temptation of scraping into the housing market. You want to have money to spare, should things change in the future.
Prepare for the future
Have a contingency plan in case you lose your income in the future, or face other challenges that make it hard for you to meet your repayments. Income protection insurance will help meet repayments should you ever lose your income due to injury or illness. It may also be worth both you and your partner taking out life insurance, should one of you pass away.
Create a budget
Analyse your finances to know exactly how much money is coming in, and where money is being spent. Doing this regularly will help identify if you are susceptible to mortgage stress. If your mortgage repayments are creeping up towards 30 per cent of your household income, consider ways to reduce expenses.
Analyse your budget to see where expenses can be minimised. Less meals out? Less retail shopping? It all adds up. It’s also worth talking to your Smartline Adviser about ways to reduce your mortgage repayments, should rates increase. You may also be in a position to remortgage your property over a longer period, which reduces your weekly repayments.
Get ahead while the going is good
While rates are low and your income is good, you might consider increasing your repayments to create a healthy surplus. That way, if mortgage stress does occur you’ll be ahead, and in a position to reduce your cash repayments.