How to avoid mortgage default
THE November rate cut would have been welcomed by many home owners. But for some, it simply won't be enough to provide relief from overwhelming mortgage repayments.
I came across some interesting research recently that pinpoints the main reasons why people struggle with their home loan, and in some cases the problems could have been avoided.
The 2010 research by RMIT on behalf of the Australian Housing and Urban Research Institute, focused on people whose home had been repossessed.
There were several key reasons why the home owners surveyed got into trouble with their loan. The overwhelming cause, reported by around 60% of respondents, was job loss or a reduction in working hours leading to a leaner pay packet. Around one in five said illness or injury prevented them from paying off their loan, and about the same proportion simply underestimated how much it would cost to own a home - both in terms of loan repayments plus other expenses.
Other reasons offered for being unable to meet repayments included relationship breakdown, taking on too many debts and high interest rates.
It's worth noting that most respondents gave more than one reason as to why they couldn't repay their mortgage. Many had run up big credit cards debts in order to meet their loan payments. This led to refinancing the loan to try and regain control of their money, which in many cases only worsened the situation.
Around 30% of the home owners surveyed took more radical action including trying to access their super to pay off the debt.
Sadly, only less than one in four sought financial advice on budgeting and other ways to manage their debts.
For anyone thinking of taking on a mortgage these findings highlight some important steps you can take to protect yourself financially.
The first is to be very realistic about the security of your job and your ability to handle loan repayments along with the raft of other costs associated with home ownership like insurance, rates, repairs and maintenance. Draw up a realistic budget and have a trial run at living on the money you'd have left over for spending once you've got a mortgage in tow. Remember too, this could be the budget you'll be living on for years - not just weeks or months.
Aim to save the biggest deposit possible, and factor in a few rate rises into your repayments. Interest rates may have fallen recently but it's a sure bet that over the course of your mortgage, rates will rise as well as fall, and it's vital that your budget can cope with increased repayments.
For anyone taking on a significant debt, having income protection insurance makes a lot of sense. It will provide a regular source of income if illness or injury prevents you from working.
Finally, if you're having trouble with your current home loan, seek help early. Don't wait until you've maxed out your credit cards or you've missed a few repayments.
Contact your lender and explain the situation or speak with a financial counsellor. Visit the website of Financial Counselling Australia (www.financialcounsellingaustralia.org.au) to find a counsellor near you. Many offer a free, or low cost, service.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine. Visit www.paulsmoney.com.au for more information.