With the steady increase in interest rates since mid-last year, many households are feeling the pinch. For those that bought their first home when interest rates were in the 2% range, it is no doubt a big adjustment for both expectations and budgets.
With good money management, most property owners will be able to cope with the higher interest payments. This is because even when rates were low, the banks tested for affordability at an interest rate of around 6.5%. As of December 2022, we’re sitting around 6.5%.
This is what Elise would call towards the high end of the normal range and has been predicting for the last 2 years that the rates would get as high as 8.5%. This may turn out to be not far off as the banks are currently testing at 8.2%. The high employment rate resulting in an inability of businesses to find workers, a recession forecast for 2023 and unforeseeable global events such as the Ukraine/Russia war are all having an impact on the financial market.
However, this article isn’t for people that just need to tighten their spending to be able to pay their mortgage. Life happens, things change and so do finances. Even with the best planning and money management, there will be homeowners who get in financial strife due to a change of circumstances. In these cases, it’s almost always best to hold onto your property if you possibly can, this article takes you through your options.
1. Get expert advice!
In the sections below we lay out the options available, but if you are in a tough situation and need to decide a plan of action, please get in touch. We will take the time to understand your situation and advise you of your options. It’s the specific details that will determine the best way forward. With all the stress that comes with money troubles, you don’t need to worry about finding the answers – we can do it for you. If you engage us early enough, we can give you multiple options!
2. Extend term of loan
Your loan payment consists of 2 parts, interest and principal. Your principal payments repay the money you borrow. Interest payments are the money you pay for the privilege of borrowing the money. Your payments are set to pay the interest and principal within the agreed term of the loan. The longer the term the more interest you will pay! So, if you have $400,000 owing and 10 years remaining on your mortgage term, your principal payments will be structured to fully pay off the $400,000 by the end of the 10 years.
If you find yourself unable to meet your loan payments, you may be able to increase the term of your loan. For example, a loan of $400K at 6% with a remaining term of 10 years would have repayments of $2,048 per fortnight. If we increase the loan term by 5 years, then the repayments become $1,557 per fortnight.
Be aware you will pay more than $74K in additional interest for that privilege, but when things turn around, we can increase your payments and get you back on track. In the meantime, you kept the house!!!
3. Switch to interest only
You can reduce your mortgage payments in the short term by switching to interest only payments. This means you aren’t paying down the mortgage and are just paying the interest owed. Generally, banks will allow interest only for a period of 2 years for a mortgage on your own home and 5 years for a mortgage on an investment property.
4. Refinance to another bank
If your current bank won’t allow you to do either of the above, another bank or lender may be able to accommodate you. We can help you find a solution that will keep you in your home and get you through a rough patch. Banks don’t like to do a refinance if you have missed payments so again talk to us early. We have lots of options other than the main banks.
5. Keep calm and call us
Remember, the options we’ve laid out above are only appropriate in the most difficult financial circumstances where a reduction in expenses isn’t going to be enough for you to afford your mortgage payments. There are long term costs to these options, but they can be a better financial choice than exiting the property market.
If you need help with a mortgage in strife, or any other mortgage challenges, reach out and let us help. Call 029 973 7911 or email email@example.com to arrange a free half hour consultation. The mortgage industry can be complex and confusing, you don’t need to find the answers yourself.