When building a home, it’s often said that the foundations are the most important part. Their primary purpose is to hold your house up – supporting the structure and preventing it from being affected by uneven ground.

Similarly, when purchasing a home and financing it with a mortgage, your financial foundation is just as crucial. A solid financial foundation can help you avoid mortgage stress, loan default, or even eviction.

Unfortunately, economic factors such as higher living expenses, interest rate hikes, or job loss can jeopardise your financial foundation.

What is mortgage stress?

Mortgage stress occurs when homeowners face difficulty meeting their mortgage repayments and their living expenses.

The Australian Bureau of Statistics has developed a “Mortgage Affordability Indicator”, which applies a 30% mortgage repayment threshold based on a household’s income.

Mortgage stress can cause immense strain on individuals and families and increase the risk of mortgage default.

Defaulting on a home loan happens when borrowers cannot make repayments as per the agreed terms and conditions of the loan agreement. This situation may result in serious consequences, including eviction and mortgagee possession of the property by the lender.

How to avoid mortgage stress and loan default

1. Know Your Financial Situation

One of the most crucial steps to avoid mortgage default is having a clear understanding of your financial situation.

By evaluating your income, expenses, and overall financial position, you can identify potential risks and understand what options are available to you. 

Tracking your income and expenses will help you to analyse your spending habits and identify areas where you can cut back or make adjustments to free up cash flow. This is also a great time to review your expenses and renegotiate with service providers. 

Reviewing your financial position may help you identify available options to assist in financial hardship.

2. Seek Professional Guidance

A mortgage broker can help you assess your current loan terms and explore options for refinancing or loan modifications that better align with your financial circumstances.

They can provide valuable advice and assist in negotiating more favourable terms with your lender.

3. Communicate with Your Lender

If you anticipate difficulties in making your mortgage repayments, it is best to communicate proactively with your lender in advance.

Most lenders have teams dedicated to supporting customers experiencing financial hardship. They may be able to offer temporary payment arrangements or alternative solutions to help you through a difficult period.

Additional Strategies for Mortgage Management

When it comes to securing your home and avoiding mortgage default in Australia, it’s essential to explore additional strategies beyond the basics. These strategies can help you build a more robust financial foundation and enhance your overall mortgage management.

Building an Emergency Fund

An emergency fund is a financial safety net that can provide peace of mind and financial security during unexpected circumstances. Here’s how to establish and use one effectively:

Creating Your Emergency Fund

• Determine the Ideal Fund Size: Aim for three to six months’ worth of living expenses as a starting point.
• Set Up a Dedicated Account: Open a separate savings account to keep your emergency funds easily accessible but separate from your regular accounts.
• Consistent Contributions: Allocate a portion of your income each month to grow your emergency fund steadily.

Using Your Emergency Fund

• True Emergencies Only: Reserve this fund for genuine emergencies, such as medical bills, unexpected home repairs, or job loss.
• Replenish It: After using your emergency fund, make it a priority to replenish it as soon as your financial situation improves.

Diversifying Income Sources

Relying solely on a single income source can leave you vulnerable to financial instability. Diversifying your income can provide stability and reduce the risk of mortgage stress. Here’s how to diversify effectively:

Exploring Multiple Income Streams

• Part-Time Work: Consider taking on part-time or freelance work, especially if your skills align with a market demand.
• Passive Income: Invest in assets that generate passive income, such as rental properties, dividend-paying stocks, or peer-to-peer lending platforms.
• Side Businesses: Explore opportunities to start a small business or side hustle that can generate additional income.

Risk Mitigation

• Assess Risks: Understand the risks associated with each income source and take steps to minimize them.
• Financial Planning: Consult with a financial advisor to create a diversified income strategy tailored to your circumstances.

The Role of Insurance in Mortgage Protection

Insurance can play a critical role in safeguarding your home and financial well-being. Consider the following insurance options to protect your mortgage:

Mortgage Protection Insurance

• Mortgage Protection Insurance can cover your mortgage repayments in case of unexpected events like disability, critical illness, or death.
• Evaluate the cost and benefits of this insurance to determine if it aligns with your needs.

Homeowners’ Insurance

• Homeowners’ Insurance provides coverage for damage to your property caused by events like fires, storms, or theft.
• Ensure your coverage is adequate to protect your investment.

Income Protection Insurance

• Income Protection Insurance can replace a portion of your income if you’re unable to work due to illness or injury.
• Having this insurance can help you continue to meet mortgage payments during times of reduced income.

By implementing these additional strategies for mortgage management, you can strengthen your financial position and enhance your ability to maintain a stable and stress-free homeownership experience.

To prevent mortgage stress and default, it’s important to actively manage your finances and have a clear understanding of your financial situation. Though it can be tough, taking early action and being transparent with your lender can help you work together to overcome financial challenges and ensure the safety of your home.     

If you are facing any difficulties in making your mortgage payments, you can find helpful resources on the MoneySmart website: https://moneysmart.gov.au/.