Mortgage Stress: What To Cut First, and What To Do Before You Fall Behind

Nearly one in three Australian mortgage holders is now classified as "at risk" of mortgage stress — the highest level recorded since the Global Financial Crisis, according to Roy Morgan Research's most recent figures. If your repayments have gone from manageable to genuinely stressful, you are not alone, and — more importantly — there is a clear, practical order of operations for dealing with it.

This post covers three things: what to cut first, how debt consolidation fits in (and where it doesn't), and what actually happens when you tell your bank you're struggling — because the honest answer is more complicated than the marketing suggests.

Step 1: Cut the controllable costs first

Before you touch the loan itself, look at what's genuinely optional. These aren't dramatic changes, but stacked together they create real breathing room:

• Streaming and subscription audit. Most households are paying for at least one service nobody's used in months. Cancel or pause anything that isn't earning its keep.

• Shop around on insurance. Home, car and health insurance premiums have all risen sharply over the past two years, and loyalty rarely pays. Getting three comparison quotes can often save well over $100 a month combined.

• Review your private health tier. Many people are on cover with extras they don't use, or a hospital tier higher than they need. This is worth a genuine annual review, not a set-and-forget.

• Meal plan instead of reactive grocery shopping. Grocery costs are one of the largest controllable line items in most budgets — planning meals around what's on special, and shopping less often, typically makes the biggest single dent.

• Reassess car costs. Servicing plans, fuel cards, and whether you actually need two vehicles are all worth a hard look.

In a hypothetical case — a Perth dual-income family with two kids and a $650,000 mortgage — working through exactly this checklist freed up roughly $840 a month before any change was made to their loan structure:

Step 2: Where debt consolidation actually helps — and its real cost

If you're carrying credit card debt or a car loan on top of your mortgage, rolling that debt into your home loan can look like an obvious win: one repayment, at a much lower interest rate than a credit card, dramatically lowers your minimum monthly outgoing. It genuinely can help — but "help" needs to be defined precisely, because keeping the debt separate and consolidating it aren't just two ways of paying the same amount. They produce different outcomes on three separate measures, and it's worth seeing all three side by side before deciding.

Path 1 — keep it separate. An $8,000 credit card and a $14,000 car loan, both at a typical unsecured rate of around 13%, paid off on their own terms rather than folded into anything else. The monthly commitment is higher — around $1,140 a month combined — but that reflects a repayment schedule designed to clear the debt in roughly two years. You're paying more each month specifically because you're paying it off fast, which is also why the total interest bill stays comparatively low: around $14,200 over the life of that debt.

Path 2 — roll it into the mortgage. The same $22,000 gets added to your home loan balance and repaid over whatever's left of a 30-year term. The interest rate drops sharply — from around 13% down to your mortgage rate of roughly 6.1% — and the monthly repayment on that portion falls to about $840, a genuine $300-a-month improvement in cash flow. But the loan term for this debt just went from two years to thirty. Spread that thin and the total interest paid on the same $22,000 climbs to around $41,800 — nearly three times what Path 1 costs, despite the lower rate, purely because it's now being repaid over fifteen times longer.

Neither path is simply "right." If your cash flow is under genuine pressure right now, the $300-a-month relief from Path 2 might be exactly what keeps you current on every other obligation — which, as the next section covers, matters more than almost anything else. The mistake isn't consolidating; it's consolidating and then leaving it there for thirty years by default. The way to get the cash-flow benefit without the long-term cost is to treat the consolidation as temporary: roll the debt in when you need the breathing room, then direct whatever extra you can back onto the loan — via extra repayments or an offset balance — once your situation stabilises, so that $22,000 is actually cleared in a few years rather than sitting on a 30-year clock by accident.

The one rule that matters more than any of this

Whatever else you do, keep every debt obligation current. This sounds obvious, but it's the single most important thing in this entire article, because it changes what's actually available to you if things get worse.

A missed payment — even one, even briefly — shows up in your credit file and in your recent repayment history, which is exactly what a lender scrutinises most closely when assessing a refinance or hardship application. Once that history has a gap in it, your options don't just get more limited; they often get dramatically more expensive, or close off completely. A lender who might have approved a straightforward refinance at a competitive rate six months ago may now only offer a non-conforming, higher-rate product — if they'll offer anything at all. If you're going to prioritise anything before it becomes unaffordable, prioritise this.

What actually happens when you tell your bank you're struggling

Under the National Credit Code, lenders are required to respond to a genuine hardship notice and can offer a range of variations to your loan: payment deferrals, reduced payment arrangements, interest-only periods, extending your loan term, capitalising arrears into the loan balance, or in some cases a temporary interest rate reduction.

On paper, this sounds like exactly what a stressed borrower needs. In practice, it's worth going in with clear eyes:

• Assistance isn't guaranteed to be well-communicated. ASIC's 2024 review of ten major home lenders found that some lenders failed to clearly explain that interest and arrears would continue accruing during a hardship arrangement, or gave inconsistent information about the impact on credit reporting. In one high-profile case, a major bank was fined $15.5 million for failing to respond to hardship notices within the legally required timeframe at all.

• The relief is often temporary — and the cliff-edge is real. ASIC's research found that 40% of customers who received hardship assistance through reduced or deferred payments fell back into arrears immediately after the assistance period ended. A repayment pause doesn't reduce what you owe; it defers it, often with arrears capitalised onto the loan, meaning you owe more once repayments resume.

• It can affect your position with other lenders. A hardship arrangement can influence how your loan is assessed for a future refinance or top-up, and extending a loan term or moving to interest-only can increase the total cost of the loan even as it eases short-term pressure.

None of this means you shouldn't contact your bank if you're struggling — you absolutely should, and early contact gives you more options than waiting. It means going in informed: ask exactly how interest and arrears will be treated during any arrangement, get the credit reporting impact in writing, and understand what your repayments look like once the arrangement ends, not just during it.

Where a broker fits into this

This is exactly the situation where an independent look at your numbers is worth having before you're in crisis, not after. Sometimes the right answer is refinancing to a lower rate while your credit file is still clean. Sometimes it's restructuring around an offset account rather than a bank's hardship program. Sometimes cost-cutting alone genuinely closes the gap. The earlier this conversation happens, the more options are on the table — see our related piece on offset vs redraw vs credit card float strategy for how the right structure can prevent stress from building in the first place.

This article is general information only and does not take into account your personal financial situation. Ian Freeman is a Credit Representative (No. 439731) of Finsure Finance & Insurance Pty Ltd (Australian Credit Licence 384704). If you're feeling the pressure of mortgage repayments, a confidential, no-obligation conversation is a good first step —