What is mortgage stress?

author-avatar By on October 23, 2020
What is mortgage stress?

Photo by Luis Villasmil on Unsplash

COVID-19 has flung many Australians into mortgage stress with thousands losing their jobs and resorting to repayment deferrals.

As many as 1.5 million Aussies are estimated to be experiencing mortgage stress as a result of COVID and the first recession in 29 years, according to Digital Finance Analytics (DFA).

On top of that, almost 100,000 borrowers could default on their home loans as a result, which could lead to a rise in forced sales.

So what is mortgage stress, how can you avoid it and what help is available if you’re currently experiencing it?

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

What is mortgage stress?

Mortgage stress is commonly defined as when a household is spending more than 30% of their gross (pre-tax) income on their mortgage repayments.

However, this can be seen as an overly simplistic definition. According to the Australian Bureau of Statistics (ABS), the 30% rule mostly applies to households whose equivalised disposable household income falls into the bottom 40% of Australia’s income distribution (referred to as the 30/40 rule of housing affordability). If a low-income household is spending more than 30% of their income on their mortgage repayments (or rent) it means they are in housing stress.

But the Australian Housing and Urban Research Institute (AHURI) says the 30% rule isn’t always a reliable measure of housing stress for low-income households.

“By repaying their mortgages, households are both paying for housing and also actually saving their money in a tax-effective wealth asset that they may draw upon in the future,” AHURI says on its website.

“In addition, a lower-income household may choose to pay more than 30 per cent of household income in order to speed up the full repayment of their mortgage debt, which can save the household significant amounts of money on interest repayments in the future, or draw down on their housing loan (and its cheaper interest rate than a personal loan) for non-housing purchases such as a new car or an expensive holiday.”

On the other hand, a high-income household may be comfortable spending 30% or more of their income on their mortgage repayments without it eating into their ability to afford other things.

But not everyone defines mortgage stress by the 30% rule. DFA defines it as when household cashflows are negative and money coming in isn’t enough to cover the cost of mortgage repayments and other outgoing expenses.

Confused? The bottom line here is that if you’re not earning stacks and stacks of money and you’re spending more than 30% of your before-tax income on your mortgage repayments, you’re probably financially maxed out. You’ll most likely already know if this is the case anyway if you’re finding that you’re regularly struggling to afford things after making your monthly repayments.

How to avoid mortgage stress

1. Buy a house you can afford

A common trap home buyers fall into is borrowing too much to get their dream home. Just because the bank approves you for a home loan up to a certain amount doesn’t mean you necessarily need to spend that much.

Instead of buying at the very top of your price range, try to buy less house than what you can actually afford (especially if you’re a first home buyer). That way you could pay your loan off quicker and maybe even build up equity faster. It pays to be realistic about how much you can comfortably afford to spend on your mortgage repayments once you’ve taken your spending habits into account.

2. Be honest about your spending habits before you take out a home loan

Before taking out a mortgage, track your spending habits for a few months to see what you’re spending your money on and to identify any areas you can cut back. If you’re earning $4,000 a month but your mortgage repayments will be around $2,000 and you want to try and save $800 a fortnight but you’re also spending $200 a week on food, $65 a week on your F45 membership, not to mention paying for dinners out three times a week and cocktails every weekend as well as Sunday morning brunches - the maths just don’t add up.

This is why it’s a good idea to track your spending habits for at least three months to see what your usual spending habits are and if there are areas you can improve on or cut out altogether. Then create a budget that allows you to comfortably make your mortgage repayments while still saving at least 10-20% of your income. This will prevent you from taking out a mortgage you can’t comfortably afford because your spending habits don’t align with your income.

3. Get an offset account

An offset account is a transaction account linked to your home loan and it acts just like a regular transaction account but with one very important difference - the money that’s in it is ‘offset’ against your home loan debt when the interest is calculated, reducing the amount of interest you owe.

For example, if you have a $400,000 home loan on a 2.58% p.a. rate over 30 years and have a starting offset balance of $1,000 and make monthly $250 deposits, you could save over $36,000 in interest and shave over five years off the loan term.

If your current lender doesn’t offer offset accounts it may be time to consider refinancing to a lender that does.

4. Refinance to a lower rate

Speaking of refinancing, if you think your current home loan interest rate is too high (some rates have even fallen below 2%), then you’re probably right and it may be time to think about getting a cheaper interest rate.

For example, if your current home loan interest rate is a high 4.00% p.a. for a $450,000 loan with a 30-year loan term, refinancing to a 2.47% p.a. interest rate could save you $377 per month in repayments. That may not sound like a lot, but over the course of a year that monthly saving adds up to over $4,500! Over the course of five years, it equates to over $22,500 saved - you get the picture. That money could go towards a holiday, a new car, or into your savings.

When you look at it like that, the hassle of refinancing could definitely be worth it. 

Mortgage hardship assistance

If you’re really struggling to keep your head above water right now, there is help available.

1. Contact your lender

The first step to take is to contact your lender and find out what help they can offer. All lenders have hardship teams ready to help borrowers who are struggling to make their mortgage repayments.

Your lender may be able to change the terms of your loan, pause or reduce your repayments (this is known as a hardship variation).

Many lenders have been allowing borrowers to temporarily defer their mortgage repayments during COVID but this support is beginning to wind up and many are now resuming their repayments. However, if you are still struggling to make repayments, there is still assistance the banks can provide.

See also: Have a mortgage deferral? Here's how your lender is expected to help when it ends

2. Sell your home

If the worst comes to the worst, it may be prudent for you to sell your home. While this is obviously not an ideal situation, it’s arguably better than the bank taking possession of your home and selling it for whatever price they can get to recoup your outstanding loan balance.

Selling your property is a major decision so it’s best to seek legal or financial advice first. You can get free legal aid via the National Association of Community Legal Centres.

You can also get financial help by contacting the below numbers.


National Debt Helpline

1800 007 007

QLD and NT

National Legal Aid

(03) 6236 3813


Consumer Credit Legal Service

(08) 9221 7066


Consumer Credit Helpline

1800 232 500

Savings.com.au’s two cents

Mortgage stress is obviously not a great financial situation to be in, so if you can, try to avoid ending up in this scenario by borrowing and living within your means.

If it’s too late to do this and you’ve already purchased a home you can’t comfortably afford or your financial situation has changed (thanks COVID) there are steps you can take, like contacting your lender and asking what hardship measures they have in place to support you.

Being under mortgage stress can take an enormous mental toll, so if you’re really struggling right now, remember that you can always reach out to Lifeline on 13 11 14.


The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Emma Duffy joined Savings.com.au as a Finance Journalist in 2019 after spending a year as the editor of The Real Estate Conversation. She's passionate about empowering people to make smart financial decisions and improve the financial literacy of Australians by translating complex finance topics into understandable, relatable content.


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