Getting a mortgage approved – whether at home or abroad – is a cause for celebration. It’s the first step on an exciting new chapter and, for many, one of the biggest milestones in one’s life. But that doesn’t mean it’s all clear sailing.
Navigating home loans (which loan type is right for me?) can be overwhelming. As can paying one back once it’s been approved. This is where ‘mortgage stress’ enters the conversation.
If you’ve ever wondered about the concept, how it’s calculated, and its implications, you’re not alone. This guide explores mortgage stress, its definition, why it’s a problem, and how you can use tools like a mortgage stress calculator to manage your financial wellbeing. Read on to take the first step towards an enjoyable and rewarding mortgage process!
What Percentage Is Mortgage Stress?
Another way to think about this question is: ‘what percentage of my income can I afford to spend on mortgage repayments?’ After all, if you’re going to be able to afford repayments for potentially decades while maintaining a comfortable lifestyle, you need to know how much you can pay out.
Traditionally, that figure is 28%. This percentage of your pre-tax income allows you to pay your mortgage off sooner without compromising too much on lifestyle choices.
Generally, mortgage stress will kick in when a household is spending more than 30% of its pre-tax income on mortgage payments. In Australia, this threshold is widely accepted as the benchmark for financial strain. When households exceed this percentage, they often struggle to cover other essential living expenses, leading to economic stress and, in severe cases, financial hardship.
How Is Mortgage Stress Calculated?
Luckily, calculating mortgage stress isn’t overly complex. But it requires a clear view of your financial situation. Here’s a straightforward breakdown:
- Calculate Your Gross Income: This is your household’s total pre-tax income.
- Determine Your Mortgage Repayments: Include monthly or annual repayments, factoring in both principal and interest.
- Apply the 30% Rule: Divide your mortgage repayments by your gross income and multiply by 100 to find the percentage.
Let’s take an example: if your household earns $100,000 annually and your mortgage repayments total $35,000 a year, your mortgage stress level would be 35%. That’s above the recommended threshold and could lead to financial strain.
There’s an even easier way to do this. That’s by using a mortgage stress calculator like this one. These will help you get quick insights and also to budget more effectively.
Why Is Mortgage Stress a Problem?
Mortgage stress isn’t just a financial problem. It can have profound impacts on mental and emotional wellbeing, and can actually have implications for the economy at large. Here’s why:
- Reduced Financial Flexibility: Of course, the more you have to spend on mortgage repayments, the less you have to save and invest. This could lead to debt or an over-reliance on high-interest loans.
- Impact on Mental Health: Financial stress is a leading cause of anxiety, with over one quarter of Australians finding it hard to get by on their current incomes. Struggling to meet mortgage repayments can exacerbate these issues, affecting both individuals and families.
- Economic Ripple Effects: On a larger scale, widespread mortgage stress can influence housing markets and the broader economy. High levels of mortgage defaults, for instance, can destabilize financial systems.
And let’s be clear: this is not a small issue. Here in Australia, rising interest rates and stagnant wage growth have compounded the issue. Many homeowners have found themselves grappling with higher repayments than anticipated. This makes tools like a mortgage stress calculator and professional mortgage advice invaluable.
Is the Mortgage Process Stressful?
It’s clear that repaying a home loan can indeed be stressful, especially when paying over 30% of your income. But what about the mortgage process more generally? Is it stressful to actually get a mortgage (whether at home or overseas)?
Let’s break down the common stress points would-be homeowners experience:
- Application Anxiety: Will I get approved? Do I have all my documents? Can I afford it? As anyone who’s been through the mortgage process will tell you, it often involves extensive paperwork, credit checks, and income verification. This can be overwhelming.
- Uncertain Approval Outcomes: Getting the paperwork in is one thing; waiting to hear back is another. It can take a while and be extremely nerve-wracking. Will I get the loan? If not, how will you adjust your plans?
- Fluctuating Market Conditions: Rising interest rates, inflation, or sudden changes in property values can make even well-planned mortgages feel precarious. These uncertainties often exacerbate stress levels.
It’s a complex process. No doubt about it. But don’t panic! There are tools and services designed to help you through. ‘Stress less money loans’, for instance, are becoming increasingly popular. These solutions aim to streamline the application process and provide tailored advice, reducing the overall burden.
Strategies to Manage and Avoid Mortgage Stress
Mortgage stress can be daunting. But you don’t have to let it creep up on you. While some things are out of your control – i.e., general market conditions – others are. You can take proactive steps to avoid mortgage stress and look forward to a bright chapter of homeownership!
- Use a Mortgage Stress Calculator: These tools offer a clear picture of your financial commitments and whether they fall within a sustainable range.
- Budget Effectively: Create a detailed budget that accounts for all income and expenses. Identify areas where you can cut back to free up funds for mortgage repayments.
- Consider Fixed-Rate Loans: Locking in a fixed interest rate can provide stability and predictability in repayments, especially during periods of economic uncertainty.
- Seek Professional Advice: Financial planners or mortgage brokers can help you find tailored solutions, such as refinancing options or restructuring debt.
- Build an Emergency Fund: Having a financial buffer can ease the strain of unexpected expenses or temporary income loss.
- Monitor Market Trends: Staying informed about interest rates, housing market shifts, and economic policies can help you make informed decisions about your mortgage.
Final Thoughts: Tackling Mortgage Stress Head-On
Mortgage stress is a very real issue affecting many people throughout Australia and beyond. But it shouldn’t put you off from pursuing your homeownership dreams. By taking professional advice and following our list of strategies for avoiding mortgage stress – and being careful about the loan agreement you make – you can take control of your mortgage and work towards financial security.
After all, it’s an exciting time to consider moving! Markets are growing, both here and in other parts of the world (including the US, the UK, Spain, Italy, and elsewhere). If you’re interested in securing a mortgage abroad and want a top service to help you navigate the process, check out Upscore. Our FinancePassport helps buyers like you leverage your financial history to access mortgage loans abroad the easy way.
Get started on Upscore to reduce your mortgage stress and take one step closer to your homeownership dream!
