How to Avoid Home Loan Repayment Stress
As the cost of living continues to rise, more people are finding themselves suffering from monthly loan repayment stress.
A January 2019 report by Digital Finance Analytics found that 31% of owner occupied households are suffering from home loan stress. In this article we get an understanding of what loan stress means and how we can avoid it.
What is home loan repayment stress?
Loan stress is a feeling people have when their monthly loan repayments are so high that they have troubles paying other bills. The general and common level at which people begin to suffer from home loan stress is when their mortgage repayments exceed 30% of their household income. It is a very painful, stressful feeling that causes much damage to families and is a common cause of relationship breakdown and separation.
People generally get into financial pressure because of a couple of reasons. Commonly they have taken on a higher loan commitment than they should have. Although not all that common these days, this can occasionally occur when an overly zealous real estate broker has helped the borrower with their loan application and exaggerated income levels in order for them to get their commission on the property sale.
Someone losing a job is also another common way people feel loan stress. A third way people get into financial pressure is when new borrowers have good intentions going into a home loan and plan to stick to a newly created budget but have become accustom to a certain lifestyle and find reducing their spending too difficult.
Take the Nook home loan stress test
There is no complete definition for home loan stress that fits everyone. But if you answer ‘yes’ to most of these questions, it is a good indication that you are feeling the home loan pinch.
Are you having troubles paying your electricity and other utility bills?
Does more than 30% of your salary go towards your home loan repayments?
Are you expecting a baby soon and are worried about how you will cover the costs of raising a child?
Are you planning to get married and are equally worried about how you will fund the wedding?
Are you concerned about how you can pay for your new car or other large purchases?
Are you having troubles paying off your credit card or other personal loan?
How can I avoid loan stress?
The easiest way to avoid the dreadful feeling of home loan stress is to purchase a home that is within your current budget limits. This can enable you to build up enough savings to see you through any unexpected financial emergency.
Home loan lending guidelines and policies mean that banks will help you avoid over-stretching your finances, but you need to do your part here too. Be sure to provide honest and detailed information about your income and living expenses. Do not allow someone helping you with your loan application convince you that it’s Ok to falsify bank application documents. Not only could this result in a black mark against your name in bank databases, it will most likely cause terrible personal pain for you and your family in the future when you are suffering from home loan stress.
1. Use a budgeting tool
Many people estimate their expenses to be less than they actually are so it is recommended to track all your expenses in a spreadsheet or some other budgeting tool. This can help you get a clearer picture of your financial situation. The better you understand your finances, the more informed you will be about the sort of monthly repayments you can afford.
2. Save cash regularly
Set up automatic deposits into a savings account and leave them there. These savings are to be used in only emergency situations like the sudden loss of a job or an illness. This will help you avoid defaulting on your loan.
3. Make extra repayments when you can afford it
Whenever possible, consider making extra repayments on your home loan – provided your particular home loan does not penalise you for this. This will reduce your principal and therefore your future interest repayments.
What should you do if you’re feeling loan stress now?
Your current situation can be a horrible feeling. There are a number of ways you may be able to reduce the pressure.
1. Discuss it with your bank
Firstly, have a chat with your bank. You might be able to consolidate your loans. Depending on your situation, some banks might be able to reconfigure your monthly repayments or allow you a short period / ‘holiday period’ without repayments to help you get back on track.
If you feel that your loan stress is temporary, you could speak to someone to help with an improved budget.
2. Eliminate unnecessary expenditure
When you have become accustomed to a certain lifestyle and standard of living, it can be difficult to make spending cuts. However, missing a mortgage repayment is much worse and can have greater consequences than downgrading a few aspects of your lifestyle.
Eliminate or cut back on expenses such as restaurant or take-away meals, take pre-prepared lunches to work, don’t buy as many new clothes, and temporarily cut out cable tv or other non-essential luxuries.