What Is Mortgage Stress?

Author: Amanda Horswill

The cost of living has been rising, with petrol and groceries, in particular, soaring in recent months. And interest rates have been rising along with it. So if you’re one of the thousands of Kiwis who will be renewing their mortgage in the next few months, you could be hit with a big hike in your mortgage repayments. For those that took out a mortgage during the record lows of last year, this could really sting.

And even if you aren’t staring down the barrel of a mortgage rate hike, depending on your financial situation, your mortgage payments could start to cause you financial stress.

What is mortgage stress?

Mortgage stress is when a household finds it difficult to pay their bills and also cover their home loan repayments. It is generally understood to be caused by an uncomfortable change to the ratio of income to loan repayments and expenses. Whether as a result of changes to your financial situation, or to your mortgage repayments.

While there seems to be little consensus in financial circles on how to measure mortgage stress, a frequently used generalised measure is that it happens when a household with relatively low income spends 30% or more of its pre-tax income on home loan repayments.

How do you know if you are in mortgage stress?

Mortgage stress means that a homeowner is finding it financially tough to meet their mortgage repayments. It’s typically the step before a mortgage arrears or default – which means the homeowner has missed a payment or a series of payments.

One way that could help you work out if you could be at risk of mortgage stress is to do a simple calculation to find out if your mortgage repayments are more than 30% of your combined household income. It could also be a good idea to see what would happen, in those calculations, if your income was reduced or the interest rate on your loan was to rise.

However, working out if you are in mortgage stress is a bit more complicated than the 30% mortgage-to-income ratio implies. It doesn’t take into account some benefits of paying more into a home loan, nor does it work for all income levels.

For example, a high-income household may choose to spend significantly more than 30 per cent of household income on their mortgage and still have more than enough money after housing costs to pay for their other expenses.

Some signs you may be facing mortgage stress include:

• You live pay cheque to pay cheque and struggle to pay bills and mortgage on time
• You’ve recently lost your job or are facing redundancy
• You’ve had to borrow money, take out a personal loan or use credit cards to cover ordinary expenses
• Your mortgage is interest only and you don’t have much equity in the property
• Financial stress is impacting your personal life, mental health and/or relationships

Another way to see if you could be at risk of mortgage stress is to use Canstar’s Budget Planner Calculator. You can experiment with varying levels of income and expenses to help see at what point you could find it hard to balance the budget.

What can I do if I am in mortgage stress?

If you are in financial strife, consider taking advantage of free financial counselling services. These services could help you make a budget, as well as go through your current spending habits. Are there subscriptions, memberships, and recreational costs you can cut back on? Can you change phone plans, broadband providers, or electricity providers to get better rates and deals?

Related article: Lowest Mortgage Rates in NZ

Another option, if you are in mortgage stress, could be to talk to your lender. They might be able to suggest ways to make loan repayments more manageable, even if it is a temporary change, such as:

• Reducing repayments to the minimum amount: it could be possible to reduce your repayment amount, or to change the frequency of payments. Speak to your lender.
• Access excess funds in the home loan: if you have an offset account, it could be possible to use these extra funds for repayments. However, this could increase the term of your loan and the amount of interest you may have to pay. If you have a redraw facility, it could be possible to withdraw some funds to cover repayments. Check the conditions of your loan.
• Ask for a repayment holiday: while pausing your repayments for a few months can provide a breathing space to fix your finances, it will also increase the amount of money you pay in interest over the term of the loan.
• Swapping to interest-only repayments: it’s a good idea to find out if there are any fees or charges related to this option.
• Stay with your lender, but restructure loan: other options could include staying with a principal-and-interest loan, but restructuring it, such as by extending the loan period, or switching to a better interest rate. However, it pays to check what fees and charges may apply to any loan changes, and extending your loan could cost you more in interest over the term of the loan.
• Refinance with a new lender: another option could be to refinance – to look for a different lender offering a more competitive interest rate. If you’re paying more interest than you need to, that could be causing unnecessary stress. However, it’s important to keep in mind there could be fees and charges associated with refinancing with another bank. There could also be break fees charged by your bank if you want to swap lenders. You may want to consider all possible costs, as well as any benefits of refinancing, before making a decision.

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About the reviewer of this page

This report was reviewed by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.