Australia leads the world in mortgage pain: Here's what you can do to ease the agony

Australia leads the world in mortgage pain: Here's what you can do to ease the agony

Australians allocate a larger proportion of their earnings towards paying off their mortgage than any other developed nation, according to the latest global financial data.

The International Monetary Fund’s (IMF) latest World Economic Outlook revealed that loan repayments as a share of income were at a staggering 15% for Australian households in December 2022 - higher than Canada, Norway, the Netherlands, Sweden and a host of other advanced economies.

The data is comparable nation to nation, as a majority of households in the countries listed pay variable interest rates.

Additionally, the portion of income dedicated to mortgage repayments is anticipated to have grown more since the period analysed by the IMF, as the cash rate has now risen by one percentage point since December 2022.

Simultaneously, the IMF revised its 2024 projections for the Australian economy downwards and cautioned that inflation is anticipated to be higher than earlier estimates.

The IMF forecasts the Australian economy to achieve 1.2% growth next year, a downgrade from its earlier projection of 1.7% in April, and lower than the anticipated population growth.

On a global scale, the peak monetary body suggested inflation is forecast to decline steadily, from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, due to tighter monetary policy aided by lower international commodity prices. Core inflation is generally projected to decline more gradually, and inflation is not expected to return to target until 2025 in most cases.

What can you do to reduce mortgage pain?

Servicing a mortgage is generally a decades long, costly process. Home loans typically last for 25-30 years. Reducing your mortgage repayments can potentially save you thousands of dollars over the life of your loan.

You can tackle this issue in a number of ways but the first thing to do is to extensively research the different options that are available to you. Understanding your choices and alternatives can provide a solid foundation from which to seek out the best opportunity. Arming yourself with the relevant information means you’ll be better prepared to engage in financial negotiations with lenders.

There are a number of steps you can take to quell high mortgage repayments. These include, but are not limited to:

Assess your budget

Take stock of your expenses and consider areas of spending where you can cut down costs and inject more funds towards your mortgage repayments. Whether this means selling some belongings on GumTree or ditching an unused subscription service, every dollar helps.

Ask your lender for a lower rate

It may be advantageous to reach out to your current lender to see if they’re willing to negotiate a lower rate on your existing home loan. If your lender is charging you a higher interest rate than that of new customers, you could request a lower rate.

If you have a good credit score and always make timely repayments, your lender may not want to lose your business and might offer you an interest rate discount or perhaps waive some fees.

If this process seems overwhelming, you could enlist the services of a mortgage broker to negotiate on your behalf.

Refinance to reduce your interest

If you’ve managed to build up some equity in your property, you may be in a position to refinance your home loan with another lender, who may charge a lower interest rate, thus allowing you to possibly make lower repayments and relieve some pressure on your budget.

If you think that you’re paying too much for your current home loan, or if you are currently experiencing mortgage stress, it may be worth considering refinancing. The interest rate, ongoing fees, features and benefits offered by another lender may better suit your personal goals and financial needs, now and in the future.

You might also consider refinancing to an interest-only home loan to gain some relief. Interest-only repayments mean you pay interest charges on your loan and leave your principal untouched. This repayment option doesn’t get you any closer to paying off your loan but can lower repayments, albeit temporarily. It’s also important to be aware that  you’ll likely pay more in total interest charges over the life of your loan.

Make extra repayments to lower servicing costs

By making extra home loan repayments on top of your obligations, you may be able to shrink your home loan principal and therefore reduce the interest charged on your mortgage. Most borrowers make regular principal and interest repayments each month, fortnight or week. These are often the minimum repayments as stipulated by the lender. 

However, many lenders will allow you to make extra repayments, either above the minimum cyclical amounts or by adding one-off lump sums when you can afford it. Lenders may allow you to make unlimited extra repayments, or they may cap how much extra you can pay towards reducing your mortgage each year.

Any extra repayments you make go towards paying down your loan’s principal. The interest charged on the loan repayments is calculated based on your remaining principal. This means that the more you pay down, the less interest you may be charged on your repayments.

Keep in mind that even if you make enough extra repayments to lower your interest charges, many lenders will automatically keep your home loan repayments the same unless you specifically ask for them to be lowered.

Don’t be afraid to ask for help

Banks are just as eager as you are to avoid mortgage defaults. If you find yourself facing financial challenges and are unable to meet your monthly mortgage payments, don't hesitate to reach out to your lender. They are typically equipped with hardship assistance options to provide you with support or assist in establishing a temporary payment plan.

If you’re really struggling with your mortgage debt, you could also consider contacting a financial counsellor.

Product database updated 22 Oct, 2023

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.