With interest rates expected to rise further over 2011, Your Mortgage looks at how you can budget to avoid over committing yourself, and what you can do to reduce the financial pressure if you are finding it hard to make ends meet.
Many economists are predicting interest rates will go up by another 1% by the end of 2011. While 1% doesn’t sound like much, this translates to an extra $205 in monthly repayment for a $300,000 loan. For a $500,000 loan, this means an additional $342 per month that you have to pay on your mortgage.
For those who are finding it hard to make ends meet as it is, a rise in interest rates will see many borrowers forced to consider dire actions and/or lose their home.
The key is planning ahead
So how can you avoid getting yourself into such a situation? Like most big decisions, planning is paramount when it comes to taking a suitably sized mortgage.
Not only do you have look at your budget to see how much surplus you have with which to make repayments, but you also need to consider what would happen if interest rates increased.
There are a number of online calculators available to get an estimation of how much you could borrow based on your income and expenses ( see www.yourmortgage.com.au/calculators), and most reputable mortgage brokers will can also give you an estimation over the phone and advise what your repayments will be. Ask your broker to give you an estimation of repayment sizes for interest rates 2 – 4% higher than what you will be paying at the time you take the mortgage. If you don’t think you will be able to meet the payments at the higher interest rates, chances are you punching above your weight in the mortgage stakes, and need to borrow less.
One way to prepare for any potential interest rate rises is to make repayments at 2 to 3% per annum higher than your initial interest rate. Not only will this help to reduce your loan more quickly, but will also reduce any financial strain should interest rates go up as you have already been making repayments at a higher rate from day one.
Reassess and revise your mortgage regularly
As your personal and financial situations change, so too should your mortgage to ensure that you always have the most suitable and appropriate product.
The line of credit you have may have been great during your renovations, but unless you need it for something else, you can probably switch it to a cheaper and more suitable principal and interest product. Other catalysts for revising your mortgage might include selling an investment property, having children, paying off a car or personal loan, or a cessation in employment. If you don’t experience any of these events, its still a good idea to get your mortgage checked every 2 – 3 years. Again, most reputable brokers are happy to give you comparisons to new products over the phone. You need to make sure however, that any financial benefit gained from switching products, is not negated by the fees that it costs to switch between lenders. The general rule of thumb is that fees paid to switch should be recouped by the cost saving of the new product during the first 1 – 2 years.
Plan ahead for interest rate rises and anything else that may effect your ability to meet your mortgage repayments. You might want to look at what other expenses you will reduce if you need to, or look at redrawing any excess funds to help meet your repayments. If you have an investment property, can you increase the rent or should you cut your losses and sell, and buy again in a better market? If you are living in the property, is there a spare room you can rent out to help cover the additional costs?
Contingency planning should also cover things like having children, or being unable to work for a period of time. Some lenders offer a reduced repayment during such times; however they are limited to short periods only. It is a good idea to talk to a qualified financial advisor about income protection and health insurance before getting a mortgage, as they will be able to give you a wide variety of options.
Have an exit strategy
If you do find yourself in the unenviable position of not being able to service your mortgage, you will find it beneficial to have previously planned for such an occurrence. Talk to your financial planner or accountant to find out what avenues are available to you to get out of or write off your debt. Plan to have “trigger” points or limits which will motivate you into action. For example, know at what stage you will put your house on the market once you are unable to make the repayments, rather than begging and borrowing from friends and family in order to fight a losing battle. Speak to your lender to see if they will accept a modified repayment plan, and ask them what if any other options are available through them. Ensure you get real estate appraisals on your property every few years, so that you have a rough estimation of what your property is worth should it come to selling it. The important thing to remember is to have a plan or strategy, and stick to it. Not only will it make a tough time easier, but it will allow you to regain some send of control over the situation.
Making ends meet
If you already have a mortgage, but are now finding it hard to make ends meet financially, there are a couple of options you can look at to help ease the burden.
Firstly, you could consider conducting a load variation with your existing lender. This may include varying the loan to a cheaper interest rate, or if you have had your loan for a while, increasing the term of the loan to another twenty-five or thirty years. The longer the loan term, the lower the monthly repayments will be. Lets say you have a loan with fifteen years left to go of your original twenty five year loan term. The payments you are making would have been calculated on your original loan balance, and after 10 years of paying making repayments you would have reduced your loan balance. If you make a loan variation and use the reduced loan balance as your new loan amount, however increase the term to twenty-five or thirty years, your monthly repayment will be significantly less.
You can also use the loan variation to make part of your loan interest only. For example if you were paying a $240,000 loan over twenty five years with a 7.32% per annum interest rate, your monthly repayments would be approximately $1745. If you made half of your loan principal and interest, and the other half interest only, your total monthly repayments would be around $1605 per month, giving you another $140 per month to help make ends meet.
Loan variations usually cost around $100 to conduct, however some lenders will allow one or two per year at no charge. While these strategies may take off some of the financial pressure, it is important to remember that they may increase the time it takes to pay off your mortgage