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Avoiding Mortgage Stress
There's no denying that a mortgage is a big responsibility, but by building a financial buffer
you should be able to stay on top.
When you are first doing your
mortgage sums, plan ahead. For
example, think about what might
happen if there were a rapid increase in mortgage
rates, if you lost one income, if you had an
unexpected child. Would you have the capacity
in your income to cover the extra expense, or do
you have a back-up plan?
Build a buffer to beat mortgage stress
One way to be ready for an unexpected financial
emergency is to make sure that you have a buffer
built into your loan. By paying off a little 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.
Keep to a budget
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.
Taking a critical look at what you 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 in interest
every year.
Cut down on credit
Credit card interest rates are often very
expensive – sometimes over 20 per cent per
annum. The best way to use a credit card is to
pay off the FULL BALANCE of your credit
card each month, i.e. not just the minimum
repayment amount. That way you benefit from
the convenience without paying punishing
interest rates.
‘Sometimes the best way to escape the debt trap is to avoid it altogether,’ says Smartline
Adviser Tony Petrevski. ‘If you don’t think that
you are disciplined enough to pay off the full
balance each month then consider cutting up
your cards and not using credit at all.’
Use pay rises wisely
‘Have you ever had the feeling a pay rise
would make all the difference to you, only to
wonder where the money has gone when you
actually received it?’ asks Tony. ‘It’s too easy
to fall into the trap of increasing spending when
we have an increase in salary.’
Consider escaping this cycle the next time you
get a pay rise by putting at least 50% of it
towards increasing your loan repayments. That
way you are building an asset that may help to
make you money in the future.
Signs of mortgage stress
If you’re struggling to maintain regular
expenses such as insurance and school fees,
cutting down on things like pay TV and
takeaways or using your credit cards for
everyday expenses such as groceries, then you
may be under mortgage stress.
‘Stop. Think,’ advises Tony. ‘Everybody has to
save for major expenses like a new car or
television, but if everyday expenses are getting
too much, then it’s time to take your finances in
hand. Talk to your mortgage broker – there are
ways we can help.’
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