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What the doctor ordered

With 11 interest rate rises heaped on Aussie home loan borrowers since the rate rising cycle has begun, it is reasonable to suspect that many of us are suffering a bit of stress. What follows is a virtual list of certain sickening interest rate ailments – from serious to potentially serious – and what a ‘mortgage doctor’ might prescribe.

Signs of struggle

Let’s start with the most dramatic condition of not being able to meet your home loan repayments. The peak lending body, which incorporates banks, non-banks, mortgage brokers and finance brokers is the Mortgage & Finance Association of Australia (MFAA). It recently addressed this worrying issue.

“It can be stressful if you find yourself unable to meet your mortgage repayments and you're in danger of defaulting,” says MFAA CEO, Phil Naylor.

“But there is almost always a solution. You just need to talk to the right people at the first sign of difficulty.”
Communication the key
The MFAA recommends borrowers take the following action to minimise their stress and maximise their options:
  1. Talk to your lender: your lender doesn't want to foreclose your loan – it’s no fun for them either. Call and let them know what's happening.
  2. Talk to your other creditors: if you're struggling with your mortgage repayments, chances are you're maxed out on your credit cards as well. You need to talk to these people, and any other creditors. It’s in their interests for you to find a solution so you need to keep them in the loop.
  3. Talk to an MFAA member: you need to talk to a mortgage specialist. They can help refinance your mortgage in a way that suits your current situation.
  4. Talk to a financial consultant: if the situation is becoming overwhelming and you are really in danger of defaulting, you may need to consider speaking to a financial consultant or accountant.
Code of conduct

MFAA members are bound by a Code of Practice to do all they can to facilitate a solution between the borrower and lender. Any member who breaks the Code is subject to disciplinary action and possible expulsion.

“There is no national regulation binding brokers to do this. The only protection borrowers can rely on is the MFAA Code of Practice,” says Naylor.

Drop the pressure

Before things get so desperate and you are starting to feel a bit sick about the current impact of rising interest rates, lets see what you can do to reduce the pressure.

Make the cut

First, I would do a budget. All of us need this and it like having a health check up and doing a purge. See what you’re spending and try to GST your life. That is, cut back spending by 10%.

Show me the money

Second, seriously look for a better job or a second job. You might have to work Friday nights or Sundays, but plenty of people used to do this kind of thing 20 years ago to get ahead or to stay out of the poor house.

Third, you could think about renting out a spare room to a student. Most of our cities have a rent crisis. There is a shortage of accommodation and rents are high. It is drastic, but having to default is too!

Meet the parents

Fourth, think about renting your house for a couple of years until rates fall. Often you can rent in a cheaper suburb and rent your house out which means you receive an income, you save on monthly outgoings and you receive hefty tax deductions as well.

This option can even be made more economical, but it does come with a more desperate or dangerous option to consider – moving in with your parents or worse still, the in-laws!

Be prepared

I know it sounds challenging, but walking away from a house is too. It is a messy play, but if good ground rules are drawn up it might work for a year or two until the pressure comes down on the rates front.

Make the switch

If you are feeling the pinch and worried about your situation if there are two more rises, then it is worth going to your bank or a mortgage broker or two to see if there are some options for switching loans.

Some brokers are advertising having loans 0.92 per cent less than the standard variable rate of interest. These discounts are usually for bigger loans, but make sure you know the costs and benefits of switching.

Weighing up the cost

You often pay exit fees when you break a loan and the Rudd Government is trying to end these, but they are reality today. Ask how long it will be before the gain from the cheaper new loan outweighs the cost of exiting the old. If you are set to be in trouble, it will be the monthly cash position that will be the big issue if you have a secure job.

Out of interest

Also you could look at the monthly payments on interest only loans. These can bring down the monthly slug, but you won’t be paying off the principal. You could switch back when rates come down, but make sure you know the costs.

Also think about typing debt counselors into your search engine and have a look to see what is on offer.
Finally, to improve your borrowing skills check out www.essentialsofborrowing.com.au

 

Published on: Thursday, February 14, 2008

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