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Mortgages 101

Article By Janik Hrabovcak | | Financial Planning

Tips for those who have a mortgage or are thinking of getting one.

There is a Danish saying that may help determine how much to borrow for your home:

“Don’t sail out farther than you can row back.”

Sometimes we can be over-confident in our ability to repay loans. Underestimating the likelihood of things potentially going wrong in our lives.

These recommendations may help you to more accurately estimate :

  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 talk a loan with only the best circumstances in mind? Saying, “I’ll be able to repay my loan, provided I keep my job, don’t get sick, and there are no unexpected bills”. Chances are you have, unfortunately things can and often DO go wrong. Consider risk and protect yourself at the start. Doing this may mean 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. This will provide a buffer that can be drawn upon to meet your loan repayments. Which is especially important 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 unforeseeable events. One way to do this is to ensure you have adequate personal insurances. Key examples include:

  • Income Protection Insurance: It 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: Helps you service or pay off your loan and provide an ongoing income if you become totally and permanently disabled.
  • Critical Illness Insurance: To support you in servicing or paying off your loan and meeting a range of expenses in the event you suffer a specified illness, such as cancer or a heart attack.
  • Life Insurance: A buffer 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. Keep in mind, there are often restrictions on making additional payments into a fixed rate loan. This would would limit your capacity to build up a buffer. From my experience, a combination of fixed and variable rate loans works best. This style of rate loan allows additional repayments to 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)

Initial difficulty in meeting mortgage repayments can lead some people to use their credit cards more often. Using debt to service debt is very likely to compound the problem.  If possible – reducing your discretionary 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. 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.

Call us today to make an appointment to support you on your pathway to Financial Freedom.

Altitude Financial Planning is a Corporate Authorised Representative of Altitude Financial Advisers Pty Ltd
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