For almost two years, the Reserve Bank of Australia had consistently suggested to Australians that interest rates would not increase until 2024. However, with several consecutive rate hikes already delivered, Philip Lowe, the Governor of the Reserve Bank of Australia (RBA), has been forced to address the mounting public anger caused by interest rate hikes by issuing an apology.
It is estimated that over 300,000 Australians who listened to the RBA's advice regarded its comments as gospel and took out a mortgage; these people may now face mortgage stress as interest rates continue to climb in Australia. Unfortunately an apology will not save the homes of many people who now will face mortgage stress as another rate hike has occurred; the official cash rate is now 3.35%.
What is Mortgage Stress?
Mortgage stress refers to the financial strain experienced by borrowers when their mortgage repayments become difficult to afford due to their income not being sufficient to cover their mortgage repayments, leaving them with limited funds for other expenses.
This increase can be caused by a variety of factors, including:
- Interest rate increases: If the Reserve Bank of Australia raises interest rates, this can result in higher mortgage repayments for borrowers.
- Changes in the housing market: If the value of homes in a particular area decreases, this can result in lower security value for lenders which alters what is called the Loan to Value Ratio (LVR). Then the lenders ask for more security which the homeowners may not have.
- Changes in the borrower's financial circumstances: If the borrower's income decreases or their expenses increase, this can result in higher mortgage repayments becoming unaffordable.
How can you prepare for mortgage stress?Australians who find themselves stressed about the RBA’s announcements of potential interest rate increases need to take action now. There are a number of actions you can take to reduce the risk of defaulting on your mortgage repayments and having your bank on your back. At GBAC Advisory, we are skilled in negotiating difficult loans when necessary. Because we really do not want the banks to win and take your property, we advise borrowers to take the following steps early.
1. Review Mortgage OptionsBorrowers should review their current mortgage and consider switching to a different loan product that may be more suitable for their current financial circumstances. This may or may not include switching to a fixed-rate mortgage, which provides greater certainty and stability in terms of mortgage repayments. However, if rates fall again those on fixed rates will be disadvantaged. Borrowers can also ask the bank to allow a longer loan term so that the regular principal repayments are spread over a longer term.
2. Consider RefinancingRefinancing is the process of taking out a new mortgage to replace an existing one. Farmers and business owners may consider refinancing if they can secure a lower interest rate, which would result in lower mortgage repayments. GBAC offers a very easy and inexpensive way to do that with its 'LoanApps'; these are based on the 'Moneygrams' that we introduced immediately when banks were deregulated. LoanApps make banks compete for the loan business.
3. Increase IncomeBorrowers can take steps to increase their income, such as finding a higher-paying job, taking a second or third job, or starting a side business. This may help them better manage their mortgage repayments and cope with any increases that may occur. This may lift your stress levels if you have children. In family-owned businesses or farms, one member may choose to work outside the business. On farms it is common for one to take a nursing or teaching job to supplement farm income.
4. Reduce ExpensesBorrowers can also take steps to reduce their expenses, such as cutting back on non-essential spending and consolidating debt. This will help free up more money each month that can be put towards mortgage repayments. It is almost always easier to cut expenses than to earn extra income; a borrower controls most of their expenses but others control most of their income.
When GBAC CEO Greg Bloomfield bought his first home, ran his family businesses, bought their sheep property and then sold that to buy their cattle property, he and his wife cut all expenditure to the bone. They skipped the pub, coffee shop and movies to channel all funds into paying down their loans as fast as possible.
It's also important for borrowers to keep an eye on interest rates and stay informed about any changes that may impact their mortgage. This can be done by regularly reading financial news sources and monitoring the Reserve Bank of Australia's monetary policy statements. GBAC offers a constant loan management service to help borrowers adapt to changes as soon as they happen.
Resources to help youIt's worth noting that while a mortgage stress can be a difficult and stressful experience, there are government and industry-based support services available to help borrowers through this time.
For example, the National Debt Helpline provides free financial counselling and support for individuals who are struggling with debt. If you are however past this point and have your bank breathing down your back, please contact GBAC Advisory for honest advice and help. It is handy to know that the banks subsidise financial counsellors.
Remember to be proactive about your finances and take control of your mortgage. By taking the above steps to prepare for any potential increases in mortgage repayments, you can ensure that you are in the best possible position to weather any financial challenges as they arise. But always remember to talk to the bank first to calm them down. Big problems frequently arise because borrowers have ignored letters from the bank about late payments. Don’t turn that little molehill into an erupting volcano by ignoring it.