You might be comfortable paying off your mortgage now, but what if things change? Here are some tips on how to avoid a mortgage stress fracture.
Paying off a mortgage is one of the biggest financial challenges you and your family will ever tackle.
And it isn’t easy – mortgage repayments take up about one-quarter of a family’s income on average, according to the Australian Bureau of Statistics’ 2016 Census.
While most families manage, what happens if your circumstances change?
An unexpected redundancy, relationship breakdown, illness or accident can dramatically impact your ability to make your payments and put you in mortgage stress.
But first, what is mortgage stress?
While there isn’t a technical definition for the term, mortgage stress is generally considered to occur when a person or family is spending 30% or more of their income on home loan repayments.
There are also a range of other criteria which would suggest you’re experience mortgage stress.
If you’re paying only the interest on your home loan, borrowing money from family, or having difficulty paying your bills, then you might be experiencing mortgage stress.
I don’t have a problem now, why worry?
It’s unwise to assume your circumstances will never change. An accident or illness can befall a person at any time, and the impact on your finances can be devastating.
An increase in interest rates can also have a significant impact on your mortgage repayments. A simple 0.25% rate hike can increase repayments on the average Australian loan ($375,000) by about $50 a month.
Over the course of a year – and with a potential of further rate hikes – this can really chew into your disposable income.
Ok, so how can I avoid it?
The smart borrower won’t wait for their circumstances to change, they’ll start planning now to make sure they can weather a storm if it hits.
Steps you can take to reduce your risk include:
Step 1: Use a mortgage calculator to see what your repayments would will look like if there was a rate increase. Would you be able to keep up?
Step 2: Review your current income and expenses, and make a new family budget. Use it to track where your money is going and where savings can be made, so you can either pay off your mortgage sooner or get by if things go awry.
Step 3: If you’re worried about your mortgage, or concerned about the impact of a future rate hike, come pay us a visit.
We can talk to you about your situation and help you make a plan to ensure a small problem doesn’t become a big one.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
The ability to obtain a mortgage in Australia to purchase a home, investment property or refinance an existing loan is rapidly changing. Up until recently all you had to do was fill out an application with your personal details, provide some documents that verified your income, 100% identification documents and some statements confirming the balances on any liabilities you had.
A lot of people have no idea exactly how mortgage loans function in today’s market, therefore applying for one these days can be a little bit complicated. If you want to understand everything you can about home mortgage loans, then you should check out the article content which comes next. Stay with me in to the subsequent paragraphs to discover a number of helpful ideas and items of wisdom which can help you choose a superior home loan.
They are now asking a lot more questions
Because of regulatory requirements lenders are now forced to check to see if you can really afford the loan amount you are applying for. Up until now when you applied for a mortgage you had to state what your monthly living expenses were. If the amount you stated was in line with The Henderson Poverty Index (HPI) nobody asked any questions even if you were driving a Ferrari and had 3 kids in private school on an $80,000 a year salary.
However, this has all changed and through regulatory pressures lenders are now obliged to take a lot closer look on whether you can afford the mortgage you are asking for.
How do lenders calculate your living expenses? There are two main methods that Australian lenders now use for calculating mortgage applicants living expenses: The Henderson Poverty Index (HPI) and the Household Expenditure Measure (HEM).
The HPI or Henderson Poverty Index
The HPI was the go to expense measurement for most lenders prior to the introduction of the National Consumer Credit Protection (NCCP) act. Nowadays though, it is seldom used. It was originally predicated on a survey of 1950’s families living in New York, however for Australian use it had some tweaks made to it to update it for the local market. Basically it’s an index calculated around the expenses of a family that has two adults and two kids, from that base they used fraction multipliers for various family structures to figure out what the expenses would be for different family scenarios.
The HPI and HEM are very much alike if applied to a couple with two kids under eighteen; nonetheless, the HEM isn’t as forgiving as the HPI when it comes to sole parent families and singles.
The HEM is now becoming the method of choice for nearly all lenders in Australia today, because it was created solely centered on Australian living expenditure information, and specifically because it analyses each family type separately.
The (HEM) or Household Expenditure Method
The HEM has now become the method of choice for most lenders when it comes to the two mechanisms and it has been established by using more than 600 regularly used household items from the Australian Bureau of Statistics (ABS) Household Expenditure Survey or (HES). The HEM calculates the median expenditures of the absolute basics that someone would spend their money on (food of course, power bills, personal transport, tv, phones internet, clothing for the family). Added to that is a 25th percentile of all expenses for your discretionary basics, this will include spending on things like eating out, alcohol and childcare. Then there are expenses that are non essential, like holidays overseas or nationally that are left out of the calculations. Mortgage payments and/or rental expenses are also left out of the HEM.
Nevertheless, lenders will insist that loan applicants reveal any expenses they have over and above the HEM’s index. In other words they will drill down to find out exactly what you’re spending your money on and whether or not you have enough money left over to make the mortgage payments you claim you can afford.
Some lenders will even go to the lengths of asking for your latest bank account transaction and credit card statements so they can analyse precisely what your spending habits are.
How to increase your borrowing capacity
Never take on fresh financial debt and also pay back your established financial obligations conscientiously whilst waiting for your home mortgage verdict. As soon as your personal debt is reduced, you’ll be eligible for a more significant home finance loan. Should your personal debt be substantial, the loan request could be turned down. In the event you are approved, your rates of interest will probably be quite high.
You should not spend extravagantly while you wait around for acceptance. An excessive amount of spending may well put up a warning sign to your mortgage provider should they do a further credit assessment a couple of days prior to your appointed getting together. If you have to carry out any significant transactions, hold back until you have signed the settlement documents.
The importance of job security
Your employment track record needs to be comprehensive in order to be eligible for a home loan. Many financiers demand a reliable 2 year employment record so that you can be approved. If you happen to change jobs excessively, you might not be in a position to get yourself a home loan. Never ever give up your employment whenever you make application for a mortgage
Should you get into difficulty making your moprtgage repayments on time continue to keep talking with the financial institution that carries your home loan in every situation. Ahead of any predicament reaching the foreclosure stage, the intelligent customer understands that it truly is worth trying to create alternative arrangements with the lender. Give them a call and consult with them concerning your problems, and find out exactly what they are able to do.
The cash you will need
Chances are your mortgage company will demand a deposit. A number of financial institutions would once say yes to mortgages with out a deposit in advance, but that’s incredibly uncommon nowadays. Prior to going forward with any application form, always ask what the deposit is likely to be.
Just before you make an attempt to find a new home loan, check to see if property values have gone down. Get a property valuation ahead of re-financing your home loan to make sure you have sufficient home equity to really make the procedure advisable.
One size does not fit all
Figure out which kind of mortgage loan you must have. There are many differing types of mortgage loans. There are various time frames, a variety of repayment plans and a varying range of loan rates. You should educate yourself on the advantages and disadvantages of each one. The ideal individual to check this out with this is your mortgage broker. The mortgage broker can easily show you all your possible choices across a full range of mortgage providers.
Lenders to avoid
Be vigilant for mortgage companies who aren’t dependable. Undesirable mortgage loan techniques can easily wind up costing you a ton of money.
Steer clear of slick talkers or loan merchants who choose to talk fairly quickly in order to try and trick you. Should the interest rates seem to be too high, be sure you do not sign-up to anything. Under no circumstances trust someone who claims your less-than-perfect credit just isn’t a problem. Last but not least, under no circumstances tell a lie on any credit application, and steer clear of any loan providers who try to advise you otherwise.
Don’t be blind to fees and charges
Make certtain that you find out what all of the mortgage loan service fees and other associated costs will be prior to you signing a home mortgage loan contract. You’ll certainly be expected to pay out settlement costs, possible commission costs along with other service fees.
Lending products with a variable rate of interest should be considered carefully. Because, as the economic climate adjusts, the interest rate of your mortgage can change at the same time and it could set you back a great deal more when it comes to interest charges. This may lead you to be unable to keep up your repayments.
When was the last time you looked at your credit report?
A favorable credit record is essential to obtaining a favourable home loan. Find out what your credit score is. Deal with any errors against your credit report, as well as do your very best to enhance your own credit score. Consolidate all of your personal debt into just one personal loan using the most competitive interest rate you are able to get, not to mention pay it religously on time each and every month.
If need be, clean up your credit history prior to looking for a new home loan. In order to get qualified to apply for any mortgage loan in today’s world you’ll require good credit. Loan providers have to know you’ll pay your debts. Therefore before you decide to submit an application, be sure that your credit rating is nice and clean.
Look beyond the rate of interest
The rate of interest you are able to get for a home loan is very important, however it is not the sole step to take into account. There are numerous additional service fees that could vary from lender to lender, also. Take into account the charges for settlement, the mortgage type being offered, and any points. You ought to get quotes from different financial institutions before you make any final decision.
As previously mentioned, lots of people have no idea of the very first thing in relation to obtaining a mortgage loan. It isn’t too difficult if you happen to grasp the procedure. Keep in mind these helpful hints so you can be geared up whenever you make an application for for a home mortgage.
Almost one million Aussie households are staring down a mortgage ‘time bomb’
Almost one million middle-income Australian households are facing a mortgage time bomb as soaring living costs plunge families into repayment stress.
A new analysis by Digital Finance Analytics (DFA) has shown that the number of households currently in mortgage distress has risen by 20 percent in the last six months to 910,000.
At the current rate, more than one million households will be struggling to make repayments on their home loan in 2018.
Primary factors ratcheting up the stress faced by families include stagnant wage growth, living pay cheque to pay cheque and the looming threat of a rise in interest rates.
Martin North, Principal of Digital Finance Analytics, says that the risks of more middle-income families borrowing enormous loans from the banks are rising.
“Risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved,” said North.
“The number of households impacted are economically significant, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at three times income.
“This is not sustainable.”
Broken down by region, NSW had the most households in stress with 238.703, followed by Victoria with 250,259, Queensland with 162,726 and WA with 121,393.
Households are defined as being “stressed” when their net income does not cover ongoing costs, including repayments on their home loans.
Households that have a tight budget but manage to make ends meet are defined as being “mildly stressed”, and those who are unable to make a mortgage repayment within the next 30 days are defined as being “severely stressed”.
Nine Network’s Finance Editor Ross Greenwood said that it’s “pretty obvious” why families are struggling.
“Families are struggling with rising costs. Rising health insurance premiums, rising electricity bills and on top of that, many families have taken on very big mortgages,” said Greenwood.
“Now if their wages aren’t growing fast then quite clearly they are going to struggle.
“Another worrying statistic is that there are now 52,000 households that this organisation has identified that are now 30 days behind on their mortgage repayments, that means technically banks could walk in and close them up.”
I have been in the mortgage brokering industry now for approximately twenty years and I have now seen a whole generation of Australians take out mortgages who have no experience of what a 7-8% interest rate mortgage is. Many of these borrowers insisted on borrowing to their maximum capacity. Although in the last six months banks have been tightening up on what any new borrowers can get loan amount wise, there is still many years of previous borrowers who pretty much were able to borrow almost anything they wanted.
Recently we have seen not only banks but many other commercial enterprises prey on the Australian consumer with increased prices (energy companies being one of the notable ones). Although many borrowers have budgeted diligently there would be very few of them that would have factored in some of the essential services price rises we are seeing.
For many there may not be a solution, however our advice is to drill down on your budget and find every last cent you can find and start paying it onto your mortgage. I would recommend you beg, borrow, and tighten your budget belt to find whatever you can to pay toward your home mortgage in order to escape the mortgage stress that may be headed your way in the not too distant future.
Also, get with your home mortgage broker, because if you have a 4 in front of your home mortgage you are probably paying too much.