First of all, what is mortgage stress and how do you know when you’re actually in it? Recently I came across this term, and kinda like self-diagnosis with Dr Google, I immediately started to freak out. Are we in mortgage stress? Is this a bad thing? OMG will we actually die from this?!
The official definition of mortgage stress is when you’re using 30% or more of your pre-tax income to pay for your mortgage. Does that make sense? This term was initially published by the US Banks, post GFC when the property market crashed. And it crashed hard! The banks believed that anyone who was contributing more than 30% of their income to their mortgage were at high risk of defaulting on their loan. Meaning that they couldn’t afford the repayments.
Since the GFC, banks globally have used the magic number of 30% as their benchmark for assessing risk. But what does this mean for you and how can you avoid it? If you’re currently sitting at over 30%, this doesn’t mean that you’re doomed to default but it could mean that you’re lacking the safe ‘buffer’ that we all need should something unexpected happen that prevents us from earning an income.
Reports from December 2017 showed that the average homeowner in NSW is currently contributing 39% of their pre-tax income to their home loan, and that isn’t including other personal loans and credit card debt. Scary right? Actually it’s just a symptom of a greater problem in NSW, and Sydney in particular. The most frightening though is that we are starting to show the same symptoms that the US property market did before it crashed…food for thought.
So before you meet with your lender (whether that’s a broker or a bank) here are some of my tips that I used before taking the plunge into mortgage land –
Please DO NOT use mortgage calculators. I used one recently on the Domain website and was told my partner and I could borrow up to $2.1mill… and then only eat baked beans for the rest of our lives! Just keep in mind that these are very basic, basic estimates and don’t take into account the extraneous conversations you would have with your lender, for example, will you need to take time off work to look after someone; is your partner likely to lose their job? Etc etc
Don’t be lured into thinking that you can afford your dream home, even if you know you can’t. Be realistic and don’t make your new home your nightmare. If interest rates went up by 2-3%, could you still afford the repayments? Be critical in your answer to this one.
Find the property that fits in your budget, not the budget that fits your property. Sometimes this may mean you won’t be able to live in your preferred suburb.
Think beyond the purchase date of your home and be honest with yourself. Are you planning on doing things, like renovations or starting a family that may eat into your budget and savings?
If you bought this house, would you still be able to put money aside for holidays or for your emergency fund?
Do you have insurance? During the application process most lenders will go through the different insurance options available to you. These are important and will come in hand if you and/or your partner find yourselves in a position where you can’t afford the repayments.
RELATED: “The share market love is real, ladies”. Once upon a time, investing in shares was just for the upper echelon of society, the heavily wealthy and financially savvy. Fast forward to the 21st century and the financially naive population (insert the #fearlessfemaletraders) are slowly realising that there is a place for them in the share market too.
I suppose another important point to make is that in a day when we want everything right NOW, as part of this generation, we need to learn self-control. We don’t need everything and for that matter, we also can’t have everything. I’m certainly not trying to change the behaviour of an entire generation – heck, I’m part of it! – but I am pointing out something that is one of the major contributors to the incredible about of debt in our country…
Fearless Female Traders
(FFT note: The above blog is the opinion of the author only. Fearless Female Traders recommends conducting your own research and consulting a financial advisor before investing Property based on the information presented)