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What is Mortgage Stress? Reviewing Your Home Loan as Interest Rates Rise

August 30, 2022
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5 mins


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what is mortgage stress

With interest rates on the rise, stress testing your mortgage has never been more important. Coupled with an increasing cost of living, Australians are frantically searching for ways to cut down on costs and service their budgets.

By stress testing your mortgage, you’ll be able to predict your future affordability, therefore helping you to budget your money better and manage rising costs. Here is everything you need to know about mortgage stress tests.

What is mortgage stress?

The cost of living is increasing at an alarming rate. With the absence of wage growth to match inflation, many Australian consumers are struggling to keep up with this expensive new way of life.

For homeowners, mortgage stress is becoming very real. Mortgage stress is when a household finds it difficult to pay their bills and cover their home loan repayments. It is generally understood to be caused by an uncomfortable change in the ratio of income to loan repayments and expenses. 

How to stress test your mortgage

When you apply for a home loan, your lender will ‘stress test’ your mortgage. This ‘test’ means potential homeowners will need to qualify for their mortgage using the minimum qualifying rate set by that lender. This rate is generally defined as adding an additional 3 per cent to current home loan interest rates or above the loan interest rate the applicant is seeking.

This serviceability test helps lenders determine whether consumers would still be able to service their loans if interest rates were to rise. When looking at the record-breaking-low interest rates we’ve seen over the past few years, Andy Kerr, the National Australia Bank’s executive of home ownership, said, “The low interest rates were causing people to be able to afford more, and they wanted to make sure that if there was a downturn, people were not borrowing too much.”

If you’re a homeowner in Australia and are affected by rate rises, there are a few ways to tell if you’re in or are headed for mortgage stress.

Ask yourself if you:

  • Pay more than 30 per cent of your pre-tax salary to your home loan?
  • Pay interest only on your home loan on your owner occupier residence?
  • Struggle to find the money for utility bills?
  • Pay those bills with your credit cards?
  • Pay only the minimum due on your credit cards?
  • Regret buying that fancy car with the balloon payment at the end of the car loan or lease?

If you answered yes to some or majority of these questions, it’s entirely possible you are facing mortgage stress, or it’s about to set in.

How to avoid mortgage stress

Unfortunately, mortgage stress isn’t always avoidable and is often a result of external factors out of your control. There are some ways you can try and avoid mortgage stress, including the following.

When house hunting, be realistic

Your borrowing power (as determined by a lender) is a rough guide to what you could borrow. However, if the bank says you can borrow $650,000, that doesn’t mean it’s a good idea to go to your limit. It can be easy to get carried away when scouring the housing market for your perfect home but staying realistic is one way to avoid future mortgage stress. 

Revisit your budget

Your budget shouldn’t be something that you set and forget. Constantly revisiting and reviewing your budget when there are changes to your financial situation (or every few months) allows you to stay on top of your money and eliminate any negative spending patterns.

Download our free budget planner to work out where your money is going.

Cut down expenses and pay off debt

We’ve said it before, and we’ll say it again – cancel your gym membership if you’re not using it! Reviewing your bank statements and cutting out unnecessary expenses such as streaming platforms, subscriptions and paying off any buy now pay later debt.


What to do if you find yourself in mortgage stress 

You’ve found yourself trapped in mortgage stress – what now? If you’re struggling with mortgage stress and making your mortgage repayments, there are a few things you can do.

Reduce payments to the minimum amount 

Depending on your loan and your lender, you might be able to reduce your payment amount or change the frequency of payments. Reach out to your Inovayt broker to discuss your options.

Access excess funds

If you have an offset account attached to your home loan, it might be possible to use these extra funds for repayments. It’s important to keep in mind if you choose this option, this could increase the term of your loan and the amount of interest you may have to pay. A redraw facility may also be a way to access additional funds.

Restructure your loan

Speak to your broker about restructuring your loan. Your broker will advise you as to whether this will accrue any fees and charges. If you want to stay with the same lender, you can talk to your Inovayt home loan expert about moving from a variable rate to a fixed rate or switching to a split variable/fixed arrangement.


Another popular option is refinancing with a new lender. This involves looking for a new lender with a more competitive interest rate. However, before you go down this path, we recommend talking to a professional about how this could affect your current mortgage. Some lenders may have hidden fees and charges, whereas others may charge break fees if you want to switch lenders.

Talk to an Inovayt Mortgage Broker

As soon as you find yourself struggling with mortgage stress, it’s important to reach out to your Inovayt Mortgage Broker.

As interest rates and the cost of living continues to rise, Australians are placed under financial strain. Stress testing your mortgage is more important than ever. If you’re worried about mortgage stress or struggling with it, reach out to one of our mortgage broker experts today.

Are you feeling the impacts of mortgage stress? We’re here to help.


Start your journey, contact Inovayt today