With the cost of borrowing likely to be low for some time, a good case can be made for renovating your home to make it larger or more comfortable rather than selling to upgrade. Negotiate a good price with tradesmen and suppliers to keep the total costs down and potentially you can add significant value to your house without having to outlay a large amount of money.

Now is also the time to take advantage of the subsidies available for insulating your home. Insulation has the advantages of making your home more comfortable and easier to sell with the added benefit of reducing your power bills. More information on home insulation subsidies is available at www.eeca.govt.nz.

There are some words of caution, however, if you are thinking of embarking on a renovation project. Strictly speaking, your home is not an investment; it is what financial planners refer to as a ‘lifestyle asset’. If you have spare funds, you can usually get a better return on your money by investing in assets which give you income as well as capital gain. If you need to borrow to do your renovations, don’t borrow so much that you are living from payday to payday to keep up with the mortgage payments. Finally, do your sums and check local property values to see if your resale value will improve by more than the cost of your project.

One of the first things you should do is talk to your lending institution or a mortgage broker. Your lender should be willing to work with you to find solutions to your repayment problems so as to avoid a mortgagee sale.

Most lenders offer repayment holidays of up to 90 days, which may be enough to let you build up your reserves or pay off other short term debt so as to reduce your weekly outgoings.

Another option may be to convert your mortgage to an ‘interest only’ mortgage. This will have the effect of reducing the amount of your repayments because you are not paying back principal. Yet another option is to extend the term of your mortgage, say from 20 years to 25 years, which will also have the effect of lowering your repayments.

All of these options should be seen as short term solutions because ideally you should pay off your mortgage as quickly as possible.

A mortgage broker may be able to help you shop around for a mortgage at a lower rate of interest, however bear in mind that depending on your circumstances, there may be penalties involved in repaying your existing lender, so get this information from your lender first.

Selling your house because you can’t keep up the mortgage payments should be a last resort. Real estate agent fees, legal fees and removal costs will eat into your deposit, and there is always the uncertainty of whether property prices will move ahead by the time you can afford to buy again.

One key advantage of a line of credit is that if you run short of funds you can spend or withdraw up to the limit that has been set. This means that you can pay all your spare cash into your line of credit to keep the balance and the interest down, knowing you can grab it back at any time. If you have a mortgage, the best return you can get for your emergency savings is to ‘invest’ it in a line of credit. The return you get will be the interest you save on your borrowing.

Some mortgage brokers and lenders advocate using a line of credit as a transaction account for receiving income and paying all your living expenses. In theory, this will ensure your loan balance is kept as low as possible. In practice, this system usually fails because unless you are very disciplined it becomes almost impossible to keep to a budget. It is better to instead make a regular payment each payday into your line of credit to reduce the balance.

Some banks are now offering customers the ability to offset balances in a range of accounts, which is a great way to keep your savings separate from your mortgage. You will only pay or earn interest on the net balance of the range of accounts. The more you save, the more you will crunch your credit!

One of the first things you should do is talk to your lending institution or a mortgage broker. The last thing your lender wants to do is sell your house in a mortgagee sale, because it is an expensive and troublesome process. Your lender should be willing to work with you to find solutions to your repayment problems.

Most lenders offer repayment holidaysof up to 90 days, which may be enough to let you build up your reserves or pay off other short term debt so that your weekly outgoings are not as great.

Another option may be to convert your mortgage to one where only the interest is payable, that is, an ‘interest only’ mortgage. This will have the effect of reducing the amount of your repayments because you are not paying back principal.

Yet another option is to extend the term of your mortgage, say from 20 years to 25 years, which will also have the effect of lowering your repayments.

All of these options should be seen as short term solutions because ideally you should pay off your mortgage as quickly as possible.

A mortgage broker may be able to help you shop around for a mortgage at a lower rate of interest, however bear in mind that depending on your circumstances, there may be penalties involved in repaying your existing lender, so get this information from your lender first.

If your mortgage is on a high variable rate, you may be able to fix the rate at a lower level. The length of time that you fix the rate for is an important decision because if interest rates drop again and you decide to sell your house or refinance your mortgage you may incur a large penalty.

Aside from your mortgage payments, look at other ways of reducing your outgoings.

An obvious thing to do is to take a close look at your budget and see if there is anything that you can cut back on. If you are not sure how to do this, contact your local budget adviser for assistance.

Selling luxury items or household goods that you don’t need is preferable to selling your house. Perhaps you have a late model car that you could exchange for a cheaper model, a boat or caravan that doesn’t get a great deal of use, or children’s toys that have been outgrown.

Look at ways of increasing your income. This could include finding a higher paying job, taking on additional part time work, asking for a wage increase, taking in a boarder, or setting up a small business that you run from home.

Selling your house because you can’t keep up the mortgage payments should be a last resort.

Real estate agent fees, legal fees and removal costs will eat into your deposit, and there is always the uncertainty of whether property prices will move ahead even more by the time you can afford to buy again.