Tags: Money. Finance. Mortgage stress. Financial advice. Loans.
MONEY TALK WITH PETER DALLIMORE
Peter Dallimore is a volunteer Financial Counsellor at the Bribie Island Neighbourhood Centre
Estimates from a number reputable sources indicate that in excess of 900,000 households nationally are experiencing mortgage stress which is where more than 30% of household income is required to cover loan repayments.
Further a recent University of Canberra study found that a 2.5 percentage point increase in interest rates above current historically low levels would lift repayments for the most leveraged households to in excess of 50% of disposable income which is not sustainable. Low-interest rates and aggressive marketing by banks and other lending institutions have encouraged borrowers to overextend themselves and not think about how they will keep up the repayments if interest rates increase or some other circumstances arise such as illness or loss of a job.
Interest only loans are another cause for concern – a “ticking time bomb” as recently described by global investment bank UBS. The report coincided with the bank regulator APRA reporting that 35% of new loans taken out in 2017 were interest only. The UBS research found that some 30% of borrowers did not realise that they had taken out an interest-only loan or that repayments may jump between 30% and 60% at the end of the interest-only period.
If you have an interest-only loan check when the loan repayments will revert to principle and interest and start to make provisions for the higher repayments. If you are struggling to keep up your mortgage repayments the sooner you take action the more options you will have to get on your finances back on track. Don’t be embarrassed about having to explain your situation to your lender. Getting into financial difficulty is something that can happen to anyone.
If your problem is short term your lender may allow you to postpone payments for an agreed period. The missed payments will have to be made up at some time in the future. You may also be able to make a case for accessing your superannuation on compassionate grounds and draw up to 3 months of repayments. If your problem is a longer-term one your lender may agree to you extending your loan period and reducing your monthly repayment accordingly.
If your circumstances have changed significantly through such things as the loss of a job or a relationship breakdown and are unlikely to improve in the foreseeable future then more drastic action such as the sale of your property may be required. Here again, early action may allow you to keep control of the sale process. Delaying may see your lender foreclosing on you and selling your property at auction.
This may result in a substantially lower price than you could have obtained through an orderly sale. Bear in mind that if the proceeds from the sale are not sufficient to cover your debt, you will have to make up the shortfall. This is a double whammy. No house and a debt to repay.
Also bear in mind that if the property is jointly owned and mortgaged, both parties are responsible for 100% of the debt. If you don’t currently have a mortgage but are contemplating getting a home loan, only borrow what you can comfortably repay on a single income and avoid interest-only loans. Lenders will probably offer you a loan based on two incomes.
You should think of how you will manage if one income is lost. If you are a two-income family use some of the second income to pay down more of the loan. If the second income is lost you can revert to your agreed repayments. A smaller loan may mean that you have to accept a lesser property than you would like but you should be able to retain it when things go wrong whereas the more expensive property may be lost.
Also plan for the worst and have income protection, TPD and life insurance there for you and your dependents to fall back on.
For more information and assistance check out moneysmart.gov.au or the National Debt Helpline http://www.ndh.org.au/ Phone 1800 007 007 Peter Dallimore is a volunteer Financial Counsellor at the Bribie Island Neighbourhood Centre.
The Financial Counselling service is free.