The common definition of “mortgage stress” is this: if you spend more than 30 per cent of your pre-tax income on your home loan repayments, then you are officially in the danger zone.
There is no denying that a mortgage is a big responsibility, how do you cope when unexpected financial issues arise?
When you are first doing your mortgage sums, plan ahead! For example:
- If there were a rapid increase in mortgage rates (keep in mind even a 1% increase in interest rates translates to a 20% increase in your repayments) – do the math.
- if you lost one income – through job loss; accident; illness.
- if you had an unexpected child.
Would you have the capacity in your income or savings to cover the extra expense?
Do you have a back-up plan?
Here are 3 key points to consider, in our next blog we will cover 3 more key points.
- Don’t borrow more than you can afford
- Build a buffer
- Keep to a budget
1. Don’t borrow more than you can afford
If you’re thinking about taking out a new home loan remember this: “there’s a big difference between what the banks say you can borrow and how much you should”.
Don’t be blinded by offerings of extra cash – remember you are responsible for your own borrowings.
Be realistic about what you are buying to meet you and your family’s needs without having to get too big a loan in other words –
“Avoid champagne tastes on beer money”!
2. Build a buffer
Get Buff – be ready for any unexpected financial emergency by ensuring that you have a buffer built into your loan. By paying off a littler extra every month you build up a cushion to make life a little easier in hard times.
A honeymoon discount rate for the first year of your mortgage gives you a great opportunity to reduce your loan right from the start. Simply pay higher repayments than you need to and you will immediately start eating away at the principal.
If you borrow to your financial limit, then consider an interest-only loan with an option to pay extra. Pay in the extra whenever you can, and only pay the minimum when you have less cash available.
3. Keep to a budget
Do a thorough budget – don’t fool yourself if you still like your coffee on the way to work each day that can add up to about $20.00 a week.
Make sure you add that to your outgoings, and if multiplied by 2 (you and your spouse) then make it $40.00 week or around $160.00 per month (did you think a cup of coffee could cost so much?).
Once you have a good handle on what is coming in and going out, you can make a proper assessment of how much you can afford to repay, in turn what you can afford to borrow.
Yes the daily coffee can go, but will it???
A budget can help you take control of your money and make sensible decisions on how you spend it.
It gives you a financial roadmap to follow.
Start by recording every time that you spend money, from big expenses to small.
Without this, you won’t get a realistic picture of where your money is going – and you might be surprised by how quickly small expenses add up.
Many of the bills and expenses you pay, such as fuel, food, insurance, rates, mortgage, rent, telephone and electricity, are repetitive and predictable.
A budget gives you a framework not only to plan ahead for these expenses, but also to plan your future with confidence. As it has been often quoted …
“People don’t plan to fail – they fail to plan”!
Taking a critical look at what you will spend will also help you to make cutbacks that will enable you to pay extra off your mortgage.
The more you pay off now, the easier your mortgage will be to manage in the future and eventually this could save you thousands of dollars of interest every year.
Garth Brown’s Comment
Two of our largest employment industries – hospitality and retail, have seen their employment conditions change markedly since the last recession in the ’90s.
Online shopping has also impacted heavily on retail.
A dip in trading today means fewer shifts tomorrow and less jobs.
This leaves hundreds of thousands of workers in a vulnerable position – especially if they have doubled down on debt in the boom times.
While this is a simplistic (albeit real-life) example, it underpins just how inter-related the top and bottom income brackets are – and how the statistics coming out of Canberra can sometimes only tell part of the story.
Other industries are also at risk and we have seen too many Australian family companies who were established for 70-100 years close their doors over recent years leaving thousands of workers without work overnight.
There is NO guarantee in any industry today that the job you thought would be for life won’t suddenly disappear tomorrow without a warning – this has significant meaning for home owners with mortgages and unless they have prepared for any unexpected loss of income then their life can be turned upside down.
The thought of losing your job is stressful because, for most of us, we just don’t really know how long we’ll be able to survive.
That’s why it’s important to know where you stand – and then work backwards.
In our next Blog we will cover ‘Avoiding Mortgage Stress – Part 2’.
- Cut down on credit
- Use pay rises wisely
- Signs of mortgage stress