Last year, Mortgage Choice released a report highlighting the prevalence of mortgage stress for first home buyers. An alarming 53% experienced mortgage stress.

There are some evidence that it does get better. Looking at Pocketbook users, 10% of our users with a mortgage have repayments exceeding the critical 30% of income mark. So over time, it does appear that early pressures of being a new homeowner dissipates. Most likely due to increased income over time.

Now here’s the bad news – relying on the fact that your income will catch up to your mortgage repayments is no longer a sound plan. It may have worked for our parents, but it’s less likely to work today. The reason is that the house-price-to-income ratio has almost doubled in the last 15 years. So our parents had a much better start.

The picture is bleak. Mortgage stress for the first home buyer is here to stay for the foreseeable future. But there are things you can do…

1. Understand your loan

Your loan will come with fee-free conditions and typically an interest rate discount. Both of which may change subject to the lender’s discretion, which could quickly put you over your stress limit. As much as you can, you should push to permanently lock in these special conditions and always cater for interest rate increases when you budget for your loan.

Additionally, most people aren’t aware that their lender has special programs for times of financial difficulty. While you should only use this as a temporary fix, it is worth knowing that there might be an extra safety net. However, do read the conditions, some may be quite onerous.

2. Understand your spending

Being knowledgeable about how you spend is a foundation for knowing whether or not you’re overextending. Doing this in a disciplined way also means there’s opportunity to make some useful spending cuts.

At Pocketbook for example, a large potion of our users notice that they spend way too much paying for things they don’t need as soon as they sign up. One example is the $2 ATM withdraw fees that add up. Many then go on to getting a map of their bank’s ATMs and change their behaviour. Smart and simple.

3. Plan for what’s coming

This is a critical step for anyone with changing circumstances. At Pocketbook, we see a lot of young couples or families who are just starting to manage their money. One mistake we commonly see is that most plan their spending based on the assumption that “everything will be the same”.

This is almost certainly not the case. For instance a future cost like childcare fees, or plans to take a career break for study should all be forward planned.

And be realistic here. Don’t plan for a 20% annual rise in income when there’s no evidence that will come true. This is a well-known psychological phenomenon called the “Valence Effect” – our tendency to think positive things will happen to us rather than negative ones.

This often leads to people falling victim to the “planning fallacy” in which we underestimate how costly something will be or how long will it take to complete a certain project (especially if you’re going to renovate). And if you think you’re immune to this, consider this: did you know that the Sydney Opera House was completed 10 years later than planned… and ended up costing $102 million compared to the $7 million that was originally budgeted?

In fact, what you should do is plan for negative events that has a good chance of happening, like the need for repairs around your property. Or a forest fire if you live in a fire-prone area.

4. Buy necessary insurance

Managing risk is the important theme here and buying the right insurance is a key leg of the strategy.

Some easy ones to not miss include:
– Property insurance in the event of costly damages to your largest asset.
– Health insurance in the event of any unforeseen medical circumstances.
– Salary insurance in the event you lose your primary income.

The tip here is that some health insurance or superfund programs offer some insurance for short-term loss of salary. So check and make sure you don’t purchase cover you may already have.

5. Raise your income… creatively

The obvious answer to all of this is to increase your income. Aside from increasing your primary salary there’s also a number of other ways to make money.

Some common ones you might want to consider include:
– Rent a room out in your new house and capitalise on the hot rental market.
– While you may not have time for a second job, there might be easy things you can do for cash via websites like Airtasker.

Bosco

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