There is a Danish saying which may help determine how much to borrow for your home.
“Don't sail out farther than you can row back.”
Sometimes people can have a tendency to be over-confident in our ability to repay loans. We also underestimate the likelihood of things potentially going wrong in our lives.
1. Seek affordability advice before you borrow to purchase
Seeking advice can help you identify your budget and cashflow situation and determine your affordability level.
Have you ever heard yourself or someone else say “I’ll be able to repay my loan, provided I keep my job, don’t get sick and I’m not hit with any large unexpected bills”? Chances are you probably have. But things can and often do go wrong. If you consider and protect against the risks at the start and along the way you can significantly reduce the impact of unforeseen events on your mortgage.
If you already have a mortgage, here are a few tips on how to reduce mortgage stress
2. Build up a buffer (to help with periods of reduced/no income)
It’s a good idea to hold (or build up) a cash reserve in a mortgage offset 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.
3. Take out personal insurances (for when you are unable to work due to illness or injury)
It’s important to ensure your income (which is what services your debts) is not compromised due to certain events beyond your control. One way to do this is to ensure you have adequate personal insurances. Key examples include:
- 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.
- 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.
- 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.
- 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.
4. Fix the interest rate (to help reduce the affects of rising interest rates)
Fixing the interest rate on your home loan can provide protection against rising interest rates. 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. From my experience, a combination of fixed and variable rate loans works best, as additional repayments can be made into the variable rate portion of the debt.
5. Don’t add fuel to the fire (don’t spend more than you earn)
When initial difficulty in meeting mortgage repayments arise, some people have been known to use their credit cards more often than they normally would. Using debt to service debt is very likely to compound the problem. If possible – reducing your discretional spending in times of reduced income can help control your cashflow.
6. Review your situation (seek advice)
At the first sign of a problem, it’s essential to seek advice, as there may be a range of potentially viable options to explore. Better still, you may want to seek advice before you decide how much to borrow.
How can we help?
We can help you assess your budget and cashflow situation and determine your affordability level. We can also determine your insurance needs and advise you on a range of other financial matters.
If you wish to speak to one of our financial advisers, please contact us here.
Altitude Financial Planning is a Corporate Authorised Representative of Altitude Financial Advisers Pty Ltd
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The information contained on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure Document.