Struggling with your home loan repayments? Here’s what to do

Financial Planning, Investing, Lifestyle
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You don’t need me to tell you that many Australian families are having a tough time thanks to high interest rates and the cost-of-living crunch, but the latest data about those battling to keep up with their mortgage repayments is sobering to say the least.

In the three months to December, mortgage arrears cost the National Australia Bank an eye-watering $193 million. It says the number of customers falling behind is on the rise.

That’s just one bank too. Across the board, there are signs that more and more Aussies are struggling, and arrears rates at multiple lenders are edging upwards.

Further, research by Roy Morgan shows more than 1.6 million mortgage holders are at risk of mortgage stress, where their repayments are up to 45 per cent of their income. That figure is 800,000 higher since rates began rising.

It’s no wonder. The average mortgage holder has seen their repayments soar by about $1500 per month, which equates to a whopping $18,000 per year. Of course, that’s based on the typical home loan size, so those in more expensive cities with larger balances are faring much worse.

If you’re in Sydney and have a home loan balance of $800,000, you’re copping about $2800 more per month in repayments. That’s more than $33,000 extra per year – a huge hit to your household budget.

Even the most financially prudent families would find that hard to swallow, especially during a cost-of-living crisis.

Can you hang on?

The good news is that most economists believe our first rate cut is on the horizon. Many believe it could be as soon as second half of this year. So, rates are set to start coming down sooner rather than later so long as inflation is under control.

But what if you can’t wait? What if things are too much to bear right now and you’re worried?

The first thing to consider is refinancing. If it’s been a while since you examined your loan structure, there could be cheaper deals out in the market to look at. Don’t assume that just because rates have been rising that there aren’t opportunities to find savings.

The mortgage market is incredibly competitive for the right types of borrowers at the moment, and lenders are fighting hard for their business. Many lenders are splashing new customers with introductory deals, discounts or cash back offers.

Talk to a financial expert about your current circumstances to see what’s possible. It could just offer the reprieve you need.

What if you're a 'mortgage prisoner'?

The financial regulator requires lenders to assess your eligibility for a mortgage using a three per cent serviceability buffer. That is, could you afford to meet repayments if rates were to rise by three per cent? Given where the cash rate is right now, that’s a tough ask for some Aussies.

It might prevent you from being able to switch to a lower rate. But some lenders are offering a reprieve for borrowers deemed to be stuck in a ‘mortgage prison’.

In a nutshell, you’re a mortgage prisoner when you’re stuck in a loan with a high interest rate that’s above the current standard variable being offered to most customers. Where you’d often be able to refinance to take advantage, the Reserve Bank’s rapid rate hikes over the past two years coupled with the serviceability buffer prevent you from jumping.

Some lenders have seen the problem and introduced new products that assess eligibility with a one per cent buffer instead, provided you meet certain criteria like good credit and a strong repayment history.

Not every bank is offering this option so speak with a financial expert about whether you’re eligible and how to apply.

It could just be the fix you need to get out of jail and take some pressure off your household budget.

Talk to your lender?

If you’re struggling to meet your repayments, don’t struggle in silence. Lenders are obligated by law to assist customers who need some help and it’s also not in their best interest for you to fall into arrears or default.

Despite “bank bashing” being a favourite Australian past-time, the banks are actually very good at dealing with and assisting customers in need.

They could offer a repayment holiday or pause, help you restructure some or all of your mortgage to interest-only for a period to reduce what you’re forking out, or find some other solution to your specific problem.

They can also refer you to free financial counsellors who can help you to examine your finances and find fat that can be cut and bad debts that can be eliminated to free up some room to breathe.

The worst thing you can do is nothing. Speak to a financial expert and your mortgage broker, ask for help, and come up with a plan.

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Andrew Mirams