What Is Mortgage Stress and How To Avoid It

Investing in properties can be a rewarding venture, but it's not without its challenges. In the current climate of high interest rates, one significant hurdle that property investors may face is mortgage stress.

What is Mortgage Stress?

Frist, let's look at Mortgage Stress. What is mortgage stress? Mortgage stress occurs when property owners find it difficult and impossible to meet their mortgage repayments commitments. This is often when there is a continued significant reduction in their income or increase in their expenses. In the current economic and property market environment in 2023, it is the latter that caused mortgage stress.

What caused the excessive inflation in 2022? In layman's terms..

We'll try to explain what happened over the past 10-15 years, in layman's terms.

The decade-long post GFC historic low interest rates have led property owners to be over-confident with taking out mortgages which they would have otherwise not be able to afford. They have over-committed themselves over the past 10-12 years, due to the historic low interest rates, buying property after property using "equities" (borrowed) in their assets to fund the new purchases. In essence, they are digging themselves a larger debt hole with the ever-growing equity spade.

All of a sudden, COVID-19 hit, leading to economic worldwide shutdown. Governments attempted to stop the world from collapsing into deflation, and started flooding the economy with billions of lockdown support "incentives" dollars to help consumers fund their expenses.

Post pandemic lockdowns, the billions of extra equities in the economy led to massive price increase. Instead of having $1 to buy 1 dollar worth of stuff pre-pandemic, consumers now have $1.30 to pay for the same exact thing. This, of course, caused a massive price increase, or massive devaluation of cash. Your pre-pandemic $1 can now only buy the something that cost 60-70 cents, pre-pandemic. Resulting in economies around the world being hit with massive inflation.

Now, in economics schools, leaders are taught to use interest rates to manage inflation in the capitalist economy. And that is exactly what our politicians do. 13 rounds of rate increases by RBA, caused mortgage rates to rise from a low 2% to over 8-9% now. This massive increase in mortgage rates caused mortgage repayments to rise.

Putting that into perspective, for a typical mortgage of $800,000, interest only repayments jumped 400% from $1333 (@ 2%) to $5333 (@ 8%).

How can you avoid Mortgage Stress?

It is also important to remember, while mortgage stress is not ideal, it is also not insurmountable. It is stressful, but do not let this stress consume you. With the right help, it can be overcome and solved.

Our investment buyers advocates can help you review your situation, asset performance and recommend solutions to help you restructure your portfolio, improve your income and/or reduce your mortgage burden. You can also seek help from other investment buyers advocates for the same review, if they provide one. It is critical to seek advice from an independent property investment advisor, instead of sales agents (they are only interested in your property listing).

What can you do to avoid Mortgage Stress?

In this article, we will explore the steps property investors can use to overcome mortgage stress and regain control of their financial situation:

1. Review and Assess your Financial Position:

The first step in reviewing your mortgage stress situation is to take stock. Do a stocktake of your current financial situation, including your mortgage commitments. Analyze your income, expenses, and existing debts. Start by creating a comprehensive budget to gain a clear understanding of your cash flow. Take a spreadsheet, list down your monthly income on 1 column, and your monthly expenses on the other column, including your mortgage repayments.

Have a separate section for EACH property you have, listing all income and expenses for each of them.

Next, review each of these expenses and identify the "nice-to-have" and "must-have" expenses. For "nice-to-have" expenses, these are what you can stop spending on, and for those "must-have" expenses, search for lower cost alternatives, where possible.

This evaluation will help you identify areas where you are currently spending your money and help you identify where you can cut back on expenses and potentially increase your income.

2. Seek Portfolio Review from a Property Investment Advocate:

Independent real estate buyers advocates can help review your existing property portfolio, appraise your property values and advice which properties you can consider selling to minimise your debts and improve your asset holdings.

However, selecting which property to downsize is a challenge to many investors, as there are too many factors to consider, and they usually have no clues which and how to identify them. Being in the stressful mortgage stress also created a mental block in the property investors, stopping them from reviewing each of these properties systematically and logically.

It is critical that you find an independent advocate for this review, to ensure you receive an impartial, no-hidden-agenda review outcome. You may need to pay a small fee (typically under $1000) for such a review, but, hey, what is a small fee, if you can receive clarify of how each property is performing, and what you need to do to prevent your mortgage stress?

The independent property buyers advocate can help identify the properties which have further growth potential in the current and immediate future market conditions, and which are the ones you that will give you constant pain, with little gain. Although it is often emotionally challenging, selling or downsizing your property portfolio is the most effective way to reduce your mortgage commitment and thus, reduce your mortgage stress, give a life line and let you to start anew, when times are better.

We will cover this topic in part 2 of this series to help mortgage stress. So, subscribe and follow our blogs and updates.

To maximise the effectiveness of this step, you need to have your portfolio reviewed BEFORE you fall behind in mortgage repayments.

3. Seek Financial Advice and Mortgage Review:

Following the review above, you will have a clear understanding of what you want to achieve and which properties to retain, refinance or sell. You are now ready to seek financial advice from mortgage brokers. With a clear idea of how each property in your portfolio should be managed, you are now ready to give the mortgage broker something to work on. Remember, most mortgage brokers are NOT investment property savvy. Their job and expertise is to process a loan or refinance application for your property. 99% of them do not have the real estate licence and experience to advice if a property is a liability or an asset and keeper. Many are also in cohorts with sales agents who just want your listings, thus, you will need to be careful who to trust.

Always take their property recommendations with a bucket of salt. They are not experienced and licenced to provide property advice, and many are in partnerships with real estate agents to encourage you to sell.

4. Communicate with your Lender:

If you do not have a mortgage broker, we can recommend some of our trusted ones. Or you can alternatively communicate directly and openly with your lender. Contact them as soon as you anticipate or experience difficulty in meeting your mortgage repayments. Contrary to popular belief, banks have the obligation to review and help you manage your mortgage repayments. And it is, in fact, in the lenders interest to help you manage your repayments. Remember, they are in the financial industry and not the real estate industry. They would rather collect your money than engage someone to sell your house. Lenders may offer various support options such as repayment holidays, interest rate renegotiation, or loan restructuring. It's in their interest to help you find a solution, as foreclosure is typically a last resort for them.

5. Explore Income Producing Strategies:

If your property is generating rental income, explore ways to maximize its potential. A property buyers advocate can help assess the current rental market and advise how and when the current rental rates should be adjusted to be competitive. Alternatively, you could also investigate the feasibility of converting your own home or spare rooms in your home into short-term rentals through platforms like Airbnb. In the right location and with the right pricing, these strategies can help increase your cash flow and alleviate mortgage stress.

Conclusion

Mortgage stress can be difficult and overwhelming for property investors, but with a proactive approach and careful consideration of available options, it can be overcome. Remember to assess your financial situation, seek professional advice, communicate with your lender, and explore strategies such as refinancing, renting, or downsizing. By taking these steps, property investors can often regain control of their mortgage before their banks take possession of the property, and work towards a more secure financial future.

Get in touch with our property advocate to help review your portfolio.

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