Purchasing a new home (or first home) is extremely exciting, but taking out a mortgage is also a big responsibility that takes equal measures of attention and self-control to manage properly. That doesn’t mean it has to be a mission though. In case you're feeling the pinch of home loan repayments, we’ve put together a few tips and tricks to help you get your finances back on track.
Before you start
1. Be realistic about what you can afford to borrow and repay. It’s easy to get excited when looking at dream houses, but try to set a strict budget from the start and stick to it! You may need to reconsider the type of house you buy, or where you buy if it’s not going to work for your budget.
2. Remember borrowing calculators can only give you estimates. Always talk to a professional to get the facts. We have a team of professionals that can give you a free initial consult and discuss your options in a no-nonsense way.
3. Always borrow less than what the numbers tell you that you can. Think about what you’ll be able to afford when interest rates rise or if you have a shortfall in income, and allow for living expenses.
If you're feeling the pinch
Even if you stick to these tips, sometimes things happen in life that might cause financial stress. If you’re struggling with your repayments, there are some things you can do:
1) Switch to interest only
If you want to reduce your immediate repayment amounts for a few years, you may be able to switch to an interest-only loan. Take for example a $350,000 loan over a 30-year term at 4.50%; the repayments on a principal and interest loan would come to $1,773. On an interest-only loan, the repayments are $1,312 saving $461 per month. As the name suggests, you will only be paying interest and not chipping away at the principal of the loan, so make sure you go back to making your full repayments as soon as you’re back on track.
2) Fix your rate
Sometimes fixed interest rates are formulated to account for future interest rate rises, meaning they can appear higher than a variable rate alternative. Having said that, it’s worth checking out what fixed rates are available, as you can sometimes get a very good deal. The main benefit of switching to a fixed rate is it will be a good way to get peace of mind and be able to budget more easily with a predictable repayment every month. 3) Take a repayment holiday
If you’re ahead on your repayments, some financial institutions may allow you to take a temporary break from your normal monthly mortgage repayments. This can be a saving grace if you are temporarily out of work, experiencing a dip in income or have some consumer debt you need to pay off. This is a good tactic to keep up your sleeve for when you really need it. 4) Use equity for a line of credit
Another handy tip if you’re under financial stress is to investigate taking out a Line of Credit (LOC). For example, if your home is worth $500,000 and your debt is $300,000, you may be able to borrow against this equity for another purpose (as long as you can still keep up the repayments). The LOC can be used to pay the shortfall of your mortgage repayment. Interest will be capitalised in the LOC until you start repaying the debt. But this tip does comes with a bold warning sign – be careful to only use your equity on essential expenses. Self-discipline is key here, as always.
5) Debt consolidation
Perhaps it's not your home loan stressing you, but other bills, such as car repayments, medical bills, credit card debt or school fees. By rolling high-interest debts into your home loan, you may be able to reduce your total repayment amount, as well as simplify your finances.
If you are suffering mortgage stress – or think you may be at risk – we are here to help.
We can take a look at your personal situation and suggest options. Don’t wait until it’s too late! Calling the office on (02) 8313 8400 or requesting a call back is a good place to start.
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