A year after Australia’s peak banking body announced lenders would pause mortgage repayments for struggling homeowners impacted by COVID-19, the Australian Banking Association has revealed an overwhelming majority of customers are back on their feet.

Almost one million loans were deferred throughout the pandemic.

Of the almost one million home and business loans put on hold during the pandemic, the Australian Banking Association says 97% had resumed payments by the end of February 2021.

However, that means around 30,000 loans – valued at more than $10 billion – remain deferred.

“The latest loan deferral figures show that while the vast majority are back on their feet, some customers are still struggling,” said Australian Banking Association CEO, Anna Bligh

“These customers should talk to their bank now about the path ahead.”

For some, that path may lead to a restructured or varied loan with lower repayments to avoid falling into mortgage stress. For others who are unable to restart repayments, that may mean making the difficult decision to sell their property while they still have equity in their home.

What is mortgage stress?

While there’s no clear precise definition of mortgage stress, the general consensus is if you’re devoting more than 30% of your pre-tax income to your home loan, you’re likely to be suffering from mortgage stress. At this level, borrowers often report they’re unable to meet other expenses because so much is being devoted to mortgage repayments.

Using this figure as a guide, a couple earning $120,000 a year would be under mortgage stress if their home loan repayments were more than $3,000 a month.

A couple earning $200,000 a year would need to be spending more than $5,000 a month to meet this threshold.

What causes mortgage stress?

As we’ve learnt from the COVID-19 pandemic, sometimes events beyond your control can impact your income and career opportunities, and push you into mortgage stress.

1. You lose your job

Almost a million Australians lost their jobs as a result COVID-19, and while this has recovered substantially, many still aren’t working as many hours as they’d like.

If you lose your job or your hours are cut, this is likely to reduce your income and make it harder to meet your mortgage repayments.

2. Your circumstances change

If you or your partner needs some time away from work due to an injury or illness, to care for someone, or even to have children, you’re also likely to suffer a dip in income.

This means you’re not earning as much as you once were and have less to devote to your mortgage.

3. Your interest rate rises

While interest rates are at record lows now – and are expected to remain so for the foreseeable future – eventually interest rates will begin to rise as the economy recovers.

If you’re on a variable rate home loan and your interest rate rises, this could increase your repayments to the point where you begin to suffer mortgage stress.

4. Your other expenses rise

Sometimes our expenses rise and unless we have a comparable increase to our income it can cause us to fall into mortgage stress.

For example, if you have a growing family or you need to spend more on insurance or other costs, it could potentially push you into mortgage stress.

How to avoid mortgage stress

While some things are beyond your control, there are steps you can take to build a stronger financial buffer.

1. Buy what you can afford

Avoiding mortgage stress begins by understanding exactly what you can afford to buy.

The easiest way to do this is to use a mortgage calculator.

Even if you already have a mortgage, you should draw up a budget so that you understand what’s coming into your bank account and what leaves it, so that you know what you can comfortably afford to pay.

2. Make extra repayments

By making additional repayments towards your mortgage, you can help build your own buffer to use if you do face financial hardship.

One way to do this is through a mortgage offset account or redraw facility. This may only be available if you have a variable interest rate mortgage, so speak with your Smartline Mortgage Adviser about your options.

3. Refinance your home loan

When you refinance you end your current loan and take out a new one. This may give you the opportunity to take advantage of a lower interest rate.

It may also give you the chance to be able to access home loan features that let you better manage your home loan such as offset accounts or redraw facilities.

What can I do if I’m under mortgage stress now?

The Australian Banking Association said banks expanded their hardship teams last year, to help customers navigate their path out of the pandemic.

The most important thing you can do if you’re under mortgage stress is to take action.

If you find yourself experiencing financial difficulties, you should talk to your bank. The earlier you let them know that you’re experiencing financial difficulties, the more options that may be available to help you.

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DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.