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Avoiding mortgage stress

Most people don’t anticipate or consider financial problems until they are in the middle of it, which unfortunately could be too late if things are out of hand.  We all go along our merry way until the unexpected happens…..a loss of a job, a new addition to the family or a change in interest rates that push you over the edge.  When arranging your home loan it is wise to put a plan into action that will protect you and your family when times are tough.  
Build a buffer to beat mortgage stress
Paying off a little extra off your mortgage each week/month not only reduces the balance and interest payments of your loan, but can also be used for emergencies such as loan interest repayments, unexpected bills or a redraw for further investment opportunities.  It is a safe guard to reduce your debt quicker and be available for a buffer if needed.  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
Setting a budget should be a priority in every household.  So many people get themselves into trouble by spending more than they earn. Credit card debt or borrowing money they simple cannot afford to pay back.  Just because Lenders continue to lend you money based on your income and liabilities, does not mean you as an individual can meet this commitment. 

How to set a budget:
  • Set up a spreadsheet noting all liabilities and their monthly cost.
  • Electricity
  • Water
  • Council rates
  • Telephone
  • Internet
  • School fees
  • Travel
  • Food/groceries
  • Current loans/future loans
  • Insurances
  • Petrol
  • General living i.e. pocket money/weekend
  • On the same spread sheet note all income received
  • The available difference is what you will have left for savings or extras.
  • How does this make you feel?  Will you be living on the edge or comfortable in your planning?
  • Practice for a few months on your future budget before making a commitment.
  • Speak to a Lawform Broker in advance of purchasing to discuss what your monthly commitment would be, based on your criteria and then start saving that money in advance of the loan to see if this is comfortable for you.
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.  Taking a critical look at what you spend will also help you to make cutbacks that will enable you to pay extra off your loan. 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.  There are many credit card facilities that have an interest free period and lower annual fees.
Sometimes the best way to escape the debt trap is to avoid it altogether. 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
If you were comfortable with your pay prior to an increase use the extra money wisely.  Often people receive a pay rise only to spend it on incidentals that they would not normally waste their money on.  Be smart with your extra earnings and allow for at least 50% of the increase to go towards paying off debt.  Start building a platform to your next investment or creating a better financial situation for future events.
Signs of mortgage stress
If you’re struggling to maintain regular expenses such as insurance and school fees and find you are using credit card to maintain your lifestyle, then you may be under mortgage stress.  Cutting down on extra debt such as PayTV or take away dining can sometimes make all the difference.  Just because you would like to purchase something, doesn’t mean now is the right time to spend.  Learn to save for what you want rather than having the mentality that you have to have it right now.  Consider consolidating your debt and start making changes based on your budget.   Talk to your mortgage broker – there are ways we can help.
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