It’s estimated around one million households are experiencing mortgage stress. Whether you are part of these statistics, or just want to avoid becoming part of them, financial literacy is a good way to safeguard yourself.
But first, let’s clarify what mortgage stress is, so we know what we’re dealing with.
Mortgage stress is recognised as a debt scenario where a homeowner is paying more than 30% of their pre-tax income towards loan repayments.
No one wants to experience mortgage stress. But that may not stop people from getting into a sticky situation.
Some people who don’t want to rent a property anymore, find a pricey housing market, where they could feel the need to take financial risks to get their foot in the door. Other people lose their jobs. Families grow. Illness can affect people’s financial wellbeing.
2018 ME Bank research1 into first-home buyers provides further insight into why a significant number of first home buyers might run into mortgage trouble. The study showed that 61 percent of the 1,000 Australian’s surveyed failed the test on the basics of property buying. Borrowers can also be prone to optimism bias, where they proceed with an optimistic view of their future without accounting for worst-case scenarios.
To tighten up on the financial literacy required to responsibly buy a home, some of the key areas you can zoom in on include the up-front costs associated with buying a home, the ongoing costs and the budgeting needed to manage your future home.
A good rule of thumb is to aim for a deposit of 20 percent of your property’s purchase price whilst still having enough in reserve to cover ongoing mortgage costs. A 20 percent deposit will reduce your loan-to-value ratio (LVR), which is the amount of your loan expressed as a percentage of the property value. For example, a $200,000 deposit on a one-million-dollar home will give you an LVR of 80%. An LVR of 80% or higher may prevent you from incurring lenders mortgage insurance (LMI). LMI is an additional cost that protects the lender in the event you can no longer meet your home loan repayments.
You should also factor in the other upfront costs which you will incur when buying a new home. There are many to be aware of, but some of the key ones include stamp duty (if you’re a first home buyer, you might be eligible for concessions or exemptions), legal and conveyancing fees, building and pest inspections, and costs for removalists and cleaners.
Being a responsible borrower also means budgeting for future ongoing costs alongside mortgage payments. These include things like insurance, council rates and strata fees, renovations, maintenance costs, utility fees and other bills.
If you find that you encounter mortgage stress, there are steps you can take to alleviate it. Getting serious about your budget can uncover some simple ways to cut costs and avoid the early stages of mortgage stress. However, if you find yourself experiencing financial hardship, you should approach your lender as soon as possible to discuss the options that are available to you. Financial counsellors are also available to provide free assistance to borrowers who want extra support when they find themselves in financial difficulty.
Want more advice about home loans? We would love to help make sure you’re set up for success, armed with all the financial knowledge you need. Come and have a chat to us at your local branch or call us on 13 14 22.