What to do if you're facing mortgage stress after the interest rate hike

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More than 23 lenders have now passed on a variable rate hike to borrowers after the Reserve Bank lifted the cash rate on Tuesday.

In the first official rate hike in more than 11 years, the RBA increased the cash rate from 0.10% to 0.35%.

The Reserve Bank has increased the cash rate by 25 basis points to 0.35% - the first time Australia has witnessed an official rate increase in more than 11 years -  and rates are expected to rise further in the coming months.

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Martin North, principal of Digital Finance Analytics, says up to 400,000 more Aussie families would tip into mortgage stress if the cash rate increased to 2.5%.

Mortgage stress 

We all suffer from financial stress at one point or another, but for banks and lenders the alarm bells ring when you only have 5% or less of your income left each month after you've deducted your living expenses and mortgage repayments.

This can be a precarious time because home loan borrowers who fall into this category have little to no buffer when interest rates rise. As at March this year, three in four homeowners in some suburbs are facing mortgage stress.

Higher property prices mean it's easy to tip over the edge.

Finance experts forecast interest rate hikes from 2% to as high as 4% by the end of the year.

For a young couple who bought a new two-bedroom unit in Sydney this year with a $1.2 million loan, a 0.5% increase on a 3.85% variable home loan would mean they have to find an extra $349 a month.

But in the scenario where they have to pay an extra 2%, their monthly repayments could go up by $1454.

And if one of them loses their income, they could face the possibility of a foreclosure or a mortgagee repossession if their missed repayments pile up.

What to do about it

Banks would rather work with you on an alternative payment arrangement before you get to the stage of selling your home.

Among the circumstances that would make you eligible for assistance are loss of income, reduction of income, injury or illness, lower income from your business, relationship breakdowns, domestic violence or financial abuse, natural disasters and gambling problems.

The most important thing is to talk to the bank immediately and explain your situation.

Get your paperwork handy, including the details of your home loan account, proof of the change in your life situation, your list of living expenses and when you expect your situation to improve or when you can go back to your normal mortgage repayments.

You should also check the National Debt Helpline because there are financial relief schemes available for those who can't meet their debt obligations, depending on which state you live in.

What banks can offer

Financial institutions can temporarily pause your repayments for anywhere from a month, three months or up to six months.

For example, Westpac has the following features:
• Reduce your loan repayments by up to 50% for up to six months on variable home loans.
• Stop your mortgage repayments entirely for up to 6 months. 
• Reduce your loan repayments by up to 50% for up to 12 months if you are on parental leave.

But there are caveats. These allowances are only for borrowers who have had the loan for more than 12 months with the bank and, more importantly, you'll have to make higher repayments after the arrangement ends.

This is to ensure you're still within the bounds of the loan's term period. For example, if you applied for a 30-year loan, applying for a repayment "holiday" doesn't mean you can extend that loan for a longer period.

In some cases, you can ask to restructure your loan to better suit your circumstances, and if you're thinking of refinancing your loan, make sure you ask your bank what its financial hardship arrangements are for those who have been customers for less than 12 months.

Whatever happens, remember that banks will only consider mortgage foreclosures as a last resort after all other options have been exhausted.

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Michelle Baltazar is editor-in-chief of Money magazine and an award-winning journalist, editor and publisher. She has worked at media companies including BRW, Shares Magazine (London) and industry newspaper Financial Standard, and has written about superannuation, wealth management, investment technology and financial advice.

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