Home loan debt surge: how to respond until wealth catches up

As the housing boom rapidly inflates mortgage sizes, borrowers who withstand the early pain will benefit later. Here’s how.

Mortgage sizes are surging, putting home ownership further out of reach for many, and leaving those lucky enough to buy real estate suffering extra financial stress.

Australia’s average mortgage has jumped $80,000 in just one year, to $580,900, official data shows. It’s grown more than $1500 a week – much faster than almost anyone can save a deposit.

Average mortgage sizes range from $397,000 in South Australia to $760,800 in New South Wales. And wherever you are, it’s going to hurt in the early days.

The housing boom has piled pressure on to borrowers. But if you have a high home loan, try to do everything possible to avoid becoming a forced seller.

What seems huge now will only seem big in a few years, will become manageable in a decade, and will seem like a pittance 20 years from now. And buying and selling costs will strip cash from you.

Here’s how to handle a high mortgage debt.

FORENSIC MONEY SCIENCE

Budgets are boring, but they can be a powerful tool to find where our money goes missing.

Go through your household expenses line by line and look for little savings and direct debits you no longer need to be paying. Most of us have some expense we’ve forgotten about that keeps slapping us every month.

Every extra dollar counts at the start of a mortgage because it reduces the interest component of your repayments. Scrapping just one bought lunch a week can divert more than $500 a year to your home loan, one takeaway meal could save more than $2000.

A low interest rate is a key to managing a big mortgage. Picture: iStock

Big savings can be made by checking all bills – loans, home and car insurance, electricity, internet and health insurance. Bill providers don’t reward loyalty, and their competitors will clamour for your business.

GET INTERESTED IN INTEREST

Your home loan interest rate has a huge impact on how fast the mortgage shrinks. Aim for something below 2.5 per cent. Bargain with your existing lender or approach others for a good refinancing deal.

Higher-interest debt on credit cards and personal loans should be repaid before targeting the mortgage. Why put $1000 off your home loan to save $30 a year when it can save you $200-plus on a credit card debt?

EXTRA INCOME

It’s never been easier to start a side-hustle, thanks to technology advances and the pandemic pushing the world further away from traditional nine-to-five employment.

You don’t have to become an Uber driver or food delivery person – extra cash can be earned by selling unwanted goods, renting out spare space at home, doing some freelancing, selling digital skills or taking in a tenant if there’s room.

My first big mortgage (well, it was big at the time) was partially paid off by international students living in our home. It also helped with tax deductions on interest payments, although there were capital gains tax issues when we later sold.

TEAM UP

If you’re really struggling with repayments, consider bringing in family members, or close friends, as potential part-owners – or at least housemates – to help share the load.

Multi-generational living is growing and has been the norm overseas for decades. Don’t underestimate the power of a team.

Originally published as Home loan debt surge: how to respond until wealth catches up