As mortgage rates continue to rise, homeowners are increasingly facing the risk of falling into mortgage arrears.
Understanding the warning signs and knowing how to manage repayments can prevent financial crises, according to the team from specialist mortgage brokerage Home Loan Experts.
Home Loan Experts senior broker manager Mary Eskander, senior broker Jonathan Preston, and mortgage brokers Siddhartha Bajracharya, Ajar Rajbhandari, and Pramesh Vaidya have all offered their thoughts on recognising the warning signs of a mortgage about to go into arrears, practical steps to manage repayments, and relevant current trends.
According to a recent paper by the Reserve Bank of Australia, housing loan arrears rates have increased steadily from low levels since late 2022, alongside rising household budget pressures from higher inflation and interest rates.
Mortgage arrears have risen from their COVID lows of 1% in Q3 2022 to 1.6% in March 2024.
While arrears rates remain around pre-pandemic levels, banks expect them to increase a bit further from here.
While no one likes to think about it, all homeowners need to know how to recognise the warning signs that they might be about to let their mortgage fall into arrears and what they can do about it.
This is where mortgage brokers, a trusted source who intricately understands their clients’ situation, can offer guidance.
Preston (pictured above, second from left) noted that if someone can see their cash flow is becoming an issue, they are better to make moves sooner rather than later.
“The most important thing is to address it as quickly as possible. Once someone falls into arrears, lending becomes a big problem, and rates skyrocket if the loan is refinanced,” Preston said.
“It is important to be on the front foot when it comes to this kind of thing; otherwise, people are playing with fire and are risking their credit files and assets.”
In terms of red flags for clients, Eskander (pictured above, far left) explained a reduction in household savings can be one to look out for.
“Once savings starts to deplete,” she said, “another indicator could be if they seek further credit to cover existing debt.
“The last sign I can think of is if a client is living paycheck to paycheck. This could be a red flag that they are heading towards a potential missed payment, leading to arrears."
Vaidya agreed, asserting that a client should start worrying about rising mortgage arrears when they “start making large sacrifices in other essential areas to meet mortgage payments”.
Once a broker has identified their client is in arrears, the next step is knowing how to manage the situation.
Preston suggested several strategies:
“Consider switching to an interest-only loan, renting out rooms, listing your house on Airbnb, or even moving back in with family. These sacrifices can help manage repayments.”
Eskander advised creating a strict home budget, building an emergency fund, cutting unnecessary spending, and limiting credit card use.
“Making extra repayments can serve as a buffer for future emergencies. Ensure your mortgage suits your needs.”
Bajracharya (pictured above, second from right) stressed the importance of staying informed about interest-rate changes and adjusting budgets accordingly.
“When rates change, calculate the impact on monthly repayments. Ignoring this can lead to bounced direct debits and dishonour fees. Budgeting monthly and ensuring your interest rate is competitive are crucial.”
Bajracharya also suggested, “Refinancing to specialist lenders can be a short-term solution if managing cash flow becomes too difficult. Once the situation improves, clients can refinance back to mainstream lenders.”
Rajbhandari (pictured above, far right) emphasised the need for timely communication with lenders.
“If repayment issues arise, contact your lender or broker promptly to explore options like refinancing or a repayment holiday. A responsive broker team can provide essential support.”
Vaidya offered some additional tips:
“Create a budget, build an emergency fund, monitor interest rates, and refinance to better rates when possible,” Vaidya said.
“Stay in constant communication with your lender, reduce discretionary expenses, seek financial counseling, and consider debt consolidation.”
Rajbhandari provided a broader perspective.
“Mortgage arrears have been a story for the past couple of years, since mortgage rates went up,” Rajbhandari said.
“Many people had rates around 2% or so and high LVR, and the rates rocketed to 6-7%. Hence, there were many issues. We had many requests for repayment holidays, et cetera.”
He noted that not everyone is equally likely to fall into arrears on their mortgage.
"It all depends on individual financial circumstances and financial habits,” Rajbhandari said.
“It can occur through life events (divorce, illness, crisis like COVID) or can just be poor money management.”
