Close to half of Australian mortgage borrowers fear being pulled under mortgage stress due to the successive rate hikes, according to the latest survey by Aus Property Professionals.

The survey found that 45% of borrowers are worried about that the current upcycle in rates would push them to spend more than 30% of their pre-tax income on their home loan repayments.

Furthermore, around 28% of the group had borrowed too clos to their maximum capacity, while a quarter of those who fear mortgage stress said they would lose their jobs.

Meanwhile, around 78% of all borrowers said mortgage stress would cause severe distress and impact their mental health.

Aus Property Professionals founder Lloyd Edge said it is concerning that a large share of households is concerned about the rate hikes and its likelihood of triggering mortgage stress.

“I always advise that people buy property under their maximum borrowing capacity, to provide a buffer in case interest rates go up or their financial circumstances change,” he said.

“You never know what the future holds, however if you leave yourself a buffer you’ve mitigated the risk of mortgage stress and will likely be able to comfortably afford your repayments regardless of interest rate hikes.”

A study by Roy Morgan showed that around a fifth of mortgage holders are already classified “at risk” of mortgage stress due to the consecutive rate increases that started in May.

Strategies to mitigate risk of mortgage stress

Mr Edge suggested three strategies homebuyers and property investors can employ to ease the risks of mortgage stress.

1. Avoid overpaying

It is crucial for any buyer to make it right from the start by not overpaying.

“When the market is hot, many buyers get fear of missing out and make an emotional decision which leads them to purchasing a property for a price above its actual market value,” Mr Edge said.

“When this happens, you’re more likely to be borrowing at your maximum capacity and burdened with a larger mortgage than you originally anticipated.”

Furthermore, buyers would not be able to recoup all the money as they would likely sell for less if their financial circumstances change and there is a need to sell the property.

2. Consider rentvesting

Rentvesting is a viable option for buyers who do not want the liability of paying a mortgage.

“With rentvesting, your tenant is helping you pay your mortgage, and you can claim the interest on the loan as a tax deduction. Keep in mind that any interest you pay on a mortgage on your own principal place of residence can’t be claimed as a tax deduction,” Mr Edge said.

3. Buy cash-flow positive properties.

This is a strategy for property investors — cash-flow positive properties often have great rental yields between 5% and 7% or even higher. These properties are often in regional areas.

The extra cash-flow provides a buffer that will help ensure that investors are not paying out of their own pocket in case the repayments go up.

“There are many regional areas that are supported by a variety of industries and economic drivers and are therefore still good locations to invest in,” Mr Edge said.

“If you’re interested in this strategy, an experienced buyer’s agent can use their knowledge and expertise to help you find a cash-flow positive property with a high rental yield that also has good potential for capital growth.”

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