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?