It’s been a stressful few months for borrowers, with the RBA announcing six interest rate increases since October 2009. Rising interest rates have pushed a number of borrowers towards mortgage stress and according to a Choice survey, 2% of surveyed homeowners have been forced to sell their property due to the downturn.
If you’re on a low income, making ends meet after paying your mortgage might be a bit harder than normal these days. The cost of living is rising, with food and petrol price increases starting to hurt hip pockets. And if you’re spending more than a third of your income on home loan repayments, chances are a few more rate rises might just push you over the edge.
If you’re wondering how you’re going to tackle the next few predicted rate rises, now might be the time to get your finances in order. But exactly what do you need to do to ensure you – and your home – survives?
1. Track your spending
If you’re not already keeping a record of exactly what you’re spending, now is a good time to start. Not only will it show you where your money is going, but an honest record can help you find out precisely where you can cut back.
2. Don’t blow the budget
It’s easy to live in the moment. Interest rates may have been put on hold but the dream can’t go on forever. If you think you’d struggle to pay an extra $200 on your home loan each month, now is the time to start putting extra into your mortgage to build up a buffer. Not only will this help you manage short-term rate rises better, but it’ll hold you in good stead if you need to ask your lender for a home loan holiday.
3. Take a holiday
Lenders typically don’t want you to default on your home loan. If you find that you’re really struggling to pay your mortgage, speak up. Ask your lender what you can do to meet repayments; depending on your loan, you may be able to switch to an interest-only loan for a few years, or put your home loan repayments ‘on holiday’ for a few months. Ask and ye shall receive, so the saying goes.
Essentially, refinancing your mortgage means taking out a new loan to replace your existing one. The old loan is paid out, and you can even consolidate other loans – such as credit card debt – into your new home loan so you only have one loan to pay off. According to the Australian Financial Group (AFG) Mortgage Index, almost two in five (38%) mortgages sold in May 2010 were used for refinancing purposes, up from 36.6% the previous month. It’s a trend AFG believes will increase as homeowners shop around for better deals to help release the pressure of rate rises.
However, if you’re considering refinancing, it’s important that you do your numbers. While you may be able to save more on your monthly repayments with a lower interest rate, or with a split loan that offers the stability of fixed rates for half of your loan and the flexibility of variable for the other half, you still need to consider the cost of exit fees when withdrawing from your existing loan. A new loan may also have upfront establishment fees and charges that may negate the savings you may get on a new loan.