Taking the stress out of a mortgage

What a difference a few weeks can make.

In September, the Fujitsu Mortgage Stress Survey (a rolling survey of 26,000 consumers) reported, "Mortgage stress relief for many as unemployment stays low, but rate rises will have an impact on some households."

According to the report, the number of households experiencing some degree of mortgage stress fell by 1.1 percent in September, suggesting that there were approximately 554,000 households in some degree of mortgage "pain", compared with a peak of 900,000 in August 2008.

So far, so good!

Then along comes two interest rate rises in October and November, taking the official cash rate to 3.5 percent, and suddenly the second part of the Fujitsu report takes on more significance.

"Concerns about future rises in interest rates came through as a cause of potential mortgage stress, with a quarter of households concerned about interest rates potentially causing repayments concerns," the report states.

"Those who had purchased within the last 12 months were particularly worried, with half of first-time buyers potentially exposed."

According to the Fujitsu report, if you can answer "yes" to at least two indicators of mortgage stress — including looking at refinancing, being behind on repayments, using your credit cards more to keep up, or being foreclosed on — you're in the anxiety belt.

But don't fret. Alex Brooks, author of Mortgage Stressbusters (Wrightbooks), has soothing words. "The biggest cause of repossession is usually ill-health, divorce and debt burdens from businesses linked to the home," she says.

"Not many people have to sell up just because they can't afford the mortgage anymore. That happened in the US with their subprime crisis, but Australia's home repossession rates are still extremely low."

All well and good, but if you're feeling the pinch, it doesn't hurt to look at your options. "On average, Australians will change their mortgage once every four or five years," says Kristy Sheppard, senior corporate affairs manager at Mortgage Choice. "We suggest a home-loan health check every year or two.

There is such a wide range of lenders and loan products out there and it's easy to save money and get extra features, or just to check that your current loan is still the one for you."

First things first

Before you panic and start shopping around, however, Brooks suggests you may wish to look closer to home first. "Few of us truly understand how mortgages or debt really work," she says.

"All we know is that when interest rates are high it is bad, and when they're low, it is good. When interest rates go up, the cost of debt increases — so the first place to start is to stop adding to it."

Sheppard agrees. "Increased personal debt is a major cause of mortgage stress," she says.

"People have been approved for a mortgage based on a certain lifestyle and financial situation — and then they'll buy a new car, go on a holiday or take on extra debt on top of that mortgage.

A reputable lender will price in a certain number of interest rate rises and increased lifestyle costs, but a mortgage is a long-term commitment and it's amazing how many people don't think ahead."

Brooks suggests a five-step plan:

1. Stop the debt roll: commit to not using credit.
2. Start budgeting.
3. Cut all high-interest debt: look at alternatives such as lower-interest credit cards with fewer features.
4. Consolidate: consider grouping all your debt together into a single, more manageable debt.
5. Assess your mortgage.

When it comes to the last point, a mortgage broker may be able to help. "It's not as simple as looking at the lowest interest rate," Sheppard says. "You have to factor in monthly costs, fees and charges. The right mortgage broker can walk you through the options to help you find a better loan for you."

The emphasis here is on the "right" mortgage broker. "If the mortgage broker is reputable, has a good cross-section of lenders on their panel and will genuinely work to find you the best possible solution, then yes, it's the way to go," Brooks says.

"Unfortunately, the big banks have bought most of the mortgage brokers we came to know and love, such as RAMS and Aussie, so many are now skewed to offering big bank mortgages, when your local credit union or local bank can offer you a similar service," she says.

"You definitely don't want a mortgage broker who offers to rescue you from financial problems by offering above-rate loans with easy approvals — stay away!"

Most big mortgage brokers don't charge the consumer — instead the broker is paid a commission by the lender if a loan is approved, plus a "trail commission" that follows the mortgage.

Sheppard suggests asking a potential broker what the commission structure is, whether they have their own loan products (which can change the bias) and that the broker is a member of the Mortgage & Finance Association of Australia.

What can I do?

Talking to someone is one thing, but what will they be able to do about your stress. "It may be that your loan can be restructured — particularly if you have money sitting in the redraw facility," Sheppard says.

"You may be able to roll personal debts into your mortgage so that you're not juggling repayments — though we do point out that you'll pay more in the long run if you do this and you'll need to look at paying off more as your financial situation improves."

Other options include extending the term of your loan to lessen repayments.

Again, you'll pay more interest and more in the long-term, but it will give you breathing space right now.

Sheppard suggests you can also speak to your lender about a "hardship variation" — they may reduce your repayments or give you a repayment "holiday". "They don't really want your house," Sheppard says. "They just want you to keep repaying the loan and interest."

Of course, sometimes the costs do outweigh the benefits of refinancing or restructuring.

"It's still worth making the comparison," Sheppard says. "You may find that break costs are not as exorbitant as you think, particularly if you've been in the loan for three or four years.

Switching to a 0.25 percent lower loan can save you tens of thousands of dollars over the years." Of course, you could consider moving. "Canberra has one of the lowest income to mortgage ratios at roughly 18 percent, while Sydney is the worst — with repayments costing more than 30 percent of the average wage," Brooks says.

A state-by-state breakdown shows that Tasmania is the most affordable for homeowners, with the average mortgage of $191,700 being 3.2 times the average male income of $59,872, according to statistics from the Australian Bureau of Statistics.

Migration information site Ausinfo101.com says that in other states the mortgage to income ratio is:

• NT $275,700 against $66,877 or 4.12 times male income
• NSW $283,300 against $69,253 or 4.09 times male income
• Queensland $270,800 against $66,518 or 4.07 times male income
• Victoria $249,000 against $66,970 or 3.72 times male income
• WA $282,800 against $81,276 or 3.48 times male income
• SA $214,800 against $63,096 or 3.40 times male income
• ACT 261,900 against $78,124 or 3.35 times male income