Useful ideas for mortgage brokers
As there has been consistent increases in mortgage rates, your clients may have an increased risk of falling into mortgage arrears.
There are some warning signs that would alert you to mortgage stress, and understanding these signs and providing information about how to manage repayments may prevent a financial crisis. Here are some thoughts on recognising the warning signs of mortgage stress and some useful ideas to manage repayments during this uncertain time.
How to identify mortgage arrears
According to a recent paper by the Reserve Bank of Australia, housing loan arrears rates have steadily increased from lower levels since late 2022. These increases sit alongside rising household budget pressures from higher inflation and interest rates.
In fact, mortgage arrears have increased from lows of 1% during COVID in the third quarter of 2022 to 1.6% in March 2024.
It’s not a topic people like to think about, but it’s important for brokers and homeowners alike to know how to recognise the warning signs that a mortgage may have entered the danger zone indicating that a mortgage may fall into arrears soon. and what they can do about it.
This is where mortgage brokers, a trusted advisor who intimately understands their clients’ situation, can help.
Red flags to look for
Low household savings
This can be one area to keep an eye on as once the client’s savings reduce, they have not got the safety net that could help them when interest and the cost of living rises. Living from pay to pay with no fall-back position means your client could be heading towards missed mortgage payments or lower than agreed mortgage payments.
Making sacrifices on normal household spending
Some clients will cut spending on essentials to continue to be able to afford their mortgage. Making large sacrifices in other essential areas to meet mortgage payments is another red flag. It is not a sustainable solution and as a trusted advisor you may be able to explore if this is happening with your clients. can explore whether
Low Cash Flow
The above red flags may indicate that cash flow is becoming an issue, and the client is better to make a move to remedy the situation as quickly as possible. Once someone falls into arrears, lending becomes a problem, and interest rates only get higher if the mortgage is refinanced.
If there is a delay in addressing mortgage stress, there is a high chance of compromising the clients credit file and other assets and things can escalate quickly.
Seeking more credit to pay arrears
It can seem attractive to the client to seek more credit to bolster their precarious financial situation, but this isn’t a viable long-term solution. Loans sought when desperate will likely exacerbate the problem rather than fixing it.
Practical tips for brokers to help your clients in stress
Once a broker has identified their client is in mortgage stress and is unable to manage their mortgage payments, the next step is knowing how you can assist. The following are some strategies you can consider:
Ask the lender for a moratorium
If repayment issues arise, a simple piece of advice is to contact your lender promptly and ask for a payment holiday. This can provide some breathing space from payments for between 3-12 months, but this change will likely appear on the client’s credit file as a hardship variation. By staying in constant contact with your lender, and by reducing discretionary expenses, can help.
Consider changing to an interest only loan
It may be worth exploring interest only options for the client with the aim of reducing the regular payment owing to the lender. This is a short-term solution while the client works out how to increase their income and decrease their expenses.
Rent out your house or a room
Consider renting out your house or a room, if available, by listing your house on Airbnb, and at the same time moving back in with family for the time being. These sacrifices can help manage repayments.
Budget
As unpalatable as it sounds, creating a strict home budget, and building an emergency fund, as well as cutting unnecessary spending, and limiting credit card use are other ways to maximise the ability to meet your repayments. Remember to be realistic in preparing the budget that isn’t so tight it’s not enjoyable. Creating a budget and ensuring your interest rate is competitive are important.
Stay Informed
Keeping a keen eye on any interest-rate changes and adjust your budget in line with that to avoid failed direct debits and dishonour fees.
Reflections and opinion
The past couple of years have seen an uptick in mortgage arrears due to higher interest rates and inflation.
Prior to 2022, many people had rates of around 2% and high Loan to Value ratios, but interest rates have now increased to 6-7%. This has created mortgage stress for many Australians.
If mortgage stress is an issue for your client encouraging them to seek financial counselling, or debt consolidation may help. Other factors may be present that indicate financial stress including life events (divorce, illness, accident, loss of employment), or there could be simply poor money management.
Understanding your client’s financial position is crucial. If they are experiencing financial hardship or struggling with debt, seeking help from services like Solve My Debt Now can provide flexible solutions to manage debt effectively.
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