How to avoid mortgage stress: Don’t let the great Australian dream of home ownership become a nightmare
When it comes to a mortgage and trying to pay it off, Australians can be their own worst enemies.
So much so, that Australia’s mortgage stress crisis has reached epidemic proportions.
Our household debt to income ratio is spinning nauseatingly up to 200 per cent.
That means for every dollar we earn, we spend two and for many who fall into that debt spiral there can appear to be no escape.
But there can be a way out. And there is a way to avoid mortgage stress in the first place.
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Turning off the credit tap
Mortgage stress is created when households spend more than they earn and a third of Australia homeowners are caught up in this money trap.
According to Digital Finance Analytics, the number of households caught in this unenviable position as of the end of the last financial year was 1.08 million.
For many the great Australian dream of home ownership has become a nightmare.
“Mortgage stress has created a nationwide crisis,” said Dominique Grubisa, CEO of wealth education and advisory firm DG Institute.
“People are dealing with more debt by calling on more credit. But that debt has to be repaid one way or another. At some point there has to be a day of reckoning. You need to turn off the credit tap”
But to get there, you need to do more than simply forgo your daily coffee, you have to play the long game.
“That scarcity mentality only really works in the short term,” Ms Grubisa said.
“You don’t want to live a depressing lifestyle forever. You need to be more conscious about how you are spending your money and organise your finances for the long-term,”
That’s not necessarily easy to do at a time of record-low wages growth.
But it doesn’t mean you need to give up on your dream of home ownership and you can’t set yourself up for a financially secure future.
There are a number of ways of approaches you can take.
Rentvesting occurs when you rent your primary residence, but own an investment property on the side.
This can allow you to live in a home suitable for your family, but also ensure you have a stable financial future, and are not struggling with week-to-week money issues.
“(Home ownership) is an old fashioned way of looking at things,” Ms Grubisa said.
“With rentvesting you can still build your way up the property ladder but you have a flexibility of choice.”
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Given the RBA’s decision to cut the cash rate twice in June and July to a record low of one per cent, you should “absolutely” be talking to your current home loan provider about a lower interest rate says Lincoln Eastment, a mortgage broker with East Financial Services.
“The banking royal commission showed how loyal customers weren’t being treated as well as they could be,” he said.
“Many banks will offer lower rates to new acquisitions than established customers.
“That’s a good deal if you are a new customer but not if you have been with the bank for a while.
“Traditionally people don’t like to change banks, but that behaviour is changing. Why? Because it all comes down to brass tacks. What is the best financial deal for you.
“Speak to your bank. If they don’t want to play ball, look elsewhere.”
Analyse your spending
Eliminate optional expenses, such as eating out, when you can. Establish your spending priorities — where your money should be spent.
Calculate a household budget that is “manageable and realistic” Ms Grubisa said.
And stick to it.
Pay off your credit card
High rate credit cards should be avoided “where ever possible,” Ms Grubisa said.
It can be very easy to rack up debt very quickly on a credit card so try to ensure you don’t incur extra interest
“If you can pay off your credit card before the statement due day make sure you do,” Mr Eastment said.
“Try to make it a non-negotiable.”
Under the Banking Code of Practice, there are provisions that allow loans to be varied for hardship.
“That means you can renegotiate the terms and conditions of the loan,” Ms Grubisa said.