One of my first clients when I started as a broker was Adrian. Adrian and his family had immigrated to Australia, he is a registered nurse and his wife worked as an orderly in the hospital. About 18 months before I met him, Adrian was quite ill for a while, he couldn’t work for about 8 months. Unfortunately they could not meet all their commitments on his wife’s wage while he was off sick. By the time I met him, they were 3 months in arears on the home loan, the credit card was over the limit and they were regularly overdrawing their bank account to meet the bills between pays.
Adrian is an extreme case, and how I helped him is a story for another day. Through our own choices or circumstances out of our control we all can end up in situations where we are struggling to meet our commitments. Whether it is due to retrenchment, reduced work hours (therefore income), failure of a business, illness or simply bad budgeting, if you have a home loan (or other debts) this can quickly lead to mortgage stress as was the case with Adrian.
There are a number of simple tactics the can help you get through difficult times and set you up so next time something unexpected happens you (and your finances) stay in control.
- Setting a budget: Work out your expenses, fortnightly or monthly, and factor in your home loan repayments and other commitments. You might need to cut back on spending in places to make sure your home loan is a priority. Keep a diary of your spending and stick to your budget.
- Cutting your debt: Reduce the number of credit cards you have (ideally down to one) and their credit limits, and only use them sparingly. Having a home loan means taking control of your spending.
- Arranging a direct debit: Arrange for your home loan repayments to be direct debited from your pay, so you always make the payment on time.
While these steps will help, it may not be enough. If you still cannot meet your repayments on your home loan and other debts comfortably you may have to look at refinancing your home. Three options available to you are:
- Lower interest rate: If you refinance your home loan to a lower interest rate this will reduce your repayments. For example a $350,000 mortgage with 25 year term and it is refinanced from 5% interest rate to 4.5% would result in a reduction in repayments of $22.50 per week ($1,170 per year).
- Extend the loan term: If you have had your mortgage for over 5 years a simple refinance to a new loan term of 30 years can offer immediate help. Using the same example above of $350,000 mortgage refinancing from a 25 year term to 30 years and reducing the interest rate from 5% to 4.5% would result in a reduction in repayments of $62.00 per week ($3,224 per year).
- Consolidate debt: The final option is to consolidate other debts into your home loan (for example credit card debt, personal loans and other liabilities where you are paying a high interest rate). If we use the same example as above of $350,000 mortgage refinancing to 30 year term and 4.5% interest rate, but this time we consolidate in a $10,000 credit card debt (with monthly repayments of $300) and a personal loan of $20,000 (with fortnightly repayments of $250). This would result in a reduction in repayments of $220.00 per week ($11,500 per year).
A note of warning: All the options come at a cost, so you should budget at least $1,000 to refinance your home loan (you will not see the cost directly as it will be added to your home loan balance, but it is a cost). Additionally both option 2 and 3 will increase the amount of interest you pay over the term of the loan, so they are not options to be taken lightly and without careful consideration.
One final note: If you do find yourself in hardship and think you will not be able to make your home loan repayment, the first thing to do is contact your lender. They have options available to them which could help you through your difficult times.