3 ways to stress test mortgage repayments

Written and accurate as at: 9 June 2022

If you have a decent buffer, you may not be fazed by the recent increase in interest rates. Perhaps it won’t impact your monthly budget all that much.

However, with more increases expected in the coming months, there are a few reasons why it may be a good idea to get on the front foot and start stress testing higher mortgage repayments now.

Why? The first reason is forced saving. When you have higher mortgage repayments to cover, you’re going to have no choice but to find the money to pay them.

Stress testing can be a great way to put some extra money aside, whether it be for a contingency fund, home improvements, mortgage repayments buffer, or your retirement.

It can also give you more time to re-engineer your finances if you need to. And perhaps most importantly, knowing you are in a good position to meet your future mortgage obligations can help give you more peace of mind. 

One way to deal with uncertainty is to consider a number of possible scenarios and be prepared with a plan. Here are 3 steps to putting your mortgage repayments to the test:

1. Run the numbers

While no one knows exactly to what extent interest rates will rise, various economists have predicted they may reach anywhere between 1.5 and 3.25 per cent by the end of 2023. With this in mind, consider using the calculator on your lender’s website or this Loan Repayment Calculator to run the numbers to see how your mortgage repayments could be affected in these potential scenarios.

2. Start living with higher mortgage repayments

Knowledge is power, but only when it is used (and applied) appropriately. With this in mind, consider stress testing potential future commitments now. This will give you an opportunity to assess whether you have enough room to move comfortably or whether you need to make adjustments to your finances.

If you find yourself falling short after you’ve taken care of your mortgage; review your monthly budget and put your spending under the microscope, especially (but not limited to) areas of discretionary spending—small tweaks can make a big difference. You might find this Budget Planner useful for this.

Depending on your existing loan arrangements, you could also consider refinancing your home loan with the aim of getting a better deal on your mortgage. Doing this could reduce your interest rate and monthly repayments, and leave you with more money to live on, or alternatively direct the surplus towards your mortgage (and subsequently pay it off in a shorter period of time).

3. Use the money you set aside productively

Depending on your circumstances, there are a few ways you could put your surplus money to good use. For example:

  1. Adding to your super: Making concessional contributions through salary sacrifice (or personal deductible contributions), or making non-concessional contributions directly into your super can go a long way to boosting your savings for retirement. Salary sacrifice (or personal deductible contributions) can also help to reduce the personal income tax you pay.
  2. Reducing the interest payable on your mortgage: If your mortgage comes with an offset account, you could consider putting in your additional surplus cash to help further reduce your outstanding loan amount and therefore offset the amount of interest you pay. Similarly, if you have a redraw facility, using any additional surplus money to make a lump sum repayment may reduce the interest you pay over the lifetime of your loan.
  3. Paying down other debts: If you have an outstanding personal loan or credit card debt, it’s likely you’re paying much more interest on it than your mortgage. With this in mind, consider using your additional surplus cash to tackle these higher interest rate debts first to possibly save you more in interest.
  4. Adding to your emergency fund: When you’re dealing with higher mortgage repayments, it may be a good idea to have some extra money set aside to cover unexpected expenses. 

As always, your best course of action depends on your own circumstances and financial plan.