In a rising property market it is easy to fall into the trap of thinking that real estate prices only go up.
When you couple that with historically low interest rates, there is a tendency amongst new home buyers to be slightly over-confident in their ability to repay loans.
We (as Aussie’s) also underestimate the likelihood of things potentially going wrong in our lives, with a prevailing attitude of ‘she’ll be right!’
The reality is that there are a large number of people already struggling with mortgage bills they are close to being unable to afford.
And if they were to suffer a job loss, get sick or injured or hit with a large or unexpected bill (hello electricity account!) things would likely go from bad to worse rather quickly.
Causes of mortgage stress
A study was completed for the Royal Melbourne Institute of Technology (RMIT) in 2010, which looked at the specific triggers that have resulted in Australian households being unable to meet their mortgage repayments.
Survey respondents were asked the initial causes and, if they changed, what the final causes were. They were also able to identify more than one cause.
The graph below shows the results.
How to reduce stress
Like most things in life, it’s difficult to make borrowing a stress-free exercise, but there are a few things you can do to reduce the angst.
Don’t borrow everything on offer
Most financial institutions determine the maximum loan they will provide based on a multiple of your income and other factors.
But if you borrow the maximum amount, you may find you are stretched from day one unless you are very disciplined with your budgeting. And 99.99% of people aren’t!!
Build up a cash buffer
It’s a good idea to hold (or build up) a cash reserve in a mortgage offset account (ideally) or other savings account to provide a buffer that can be drawn upon to meet your loan repayments if you become ill or are off work for other reasons.
Have a back up plan
While mortgage protection insurance can provide peace of mind (in regards to your mortgage anyway) for a limited time frame, other types of insurances should be considered to give you the ultimate peace of mind with respect to your finances as a whole.
- Income Protection Insurance which can replace up to 75% of your income if you are unable to work due to illness or injury. This can ensure you are able to continue meeting the majority of your living expenses, not just your loan repayments.
- Critical Illness Insurance which can help you service or pay off your loan and meet a range of expenses in the event you suffer a specified illness, such as cancer or a heart attack.
- Total and Permanent Disability Insurance which can help you service or pay off your loan and provide an ongoing income if you become totally and permanently disabled.
- Life Insurance which can be used to service or pay off your loan and provide your family with an ongoing income if you pass away.
Fix the rate
Fixing the interest rate on your home loan can provide protection against rising interest rates and offers certainty with respect to your monthly repayment for the term of the fixed period.
The downside is there are often restrictions on making additional payments into a fixed rate loan, which would limit your capacity to build up a buffer. If household cashflow is tight, you are getting by on one income as a young family then it is likely the benefit of a fixed vs variable rate will work in your favour.
Many people however find a combination of fixed and variable rate loans works best, as additional repayments can be made into the variable rate portion of the debt.
Don’t add fuel to the fire
Don’t fall into the trap of using debt to service debt. That is, relying on other loans or credit cards to service the mortgage repayment. This kind of response is only going to compound the problem.
Ask for help
At the first sign of a problem, the easiest thing to do is talk to someone who can help!
There may be a range of potentially viable options to explore. Better still, you may want to get some financial advice before you decide how much to borrow.
A good adviser can help you work out your budget and work with you to determine your affordability level. They will also help you to focus on other goals you may want to achieve in the short, medium and long term and the cash flow that may be required to meet them.
You don’t what to over commit on your mortgage to the point where everything else in your life is unattainable.
They can also assess your insurance needs and advise you on a range of other financial matters.
Get in touch with me to talk through your affordability.
I love helping set busy mums up for financial success!!