Managing your Mortgage

Buying a house is the most important financial decision that most people ever make. The financial consequences of taking on a mortgage can have either a favourable or disastrous effect on your future prosperity depending on how well your mortgage is managed.

Money borrowed to purchase a house that you live in yourself is referred to as ‘bad debt’ as opposed to ‘good debt’ which is money borrowed to purchase a property or business that makes an investment return. Bad debt should always be kept to a minimum and repaid as quickly as possible.

The starting point with managing your mortgage is to buy a house that is well within your budget. Save a good deposit and buy the lowest value house you feel comfortable living in. Interest rates on mortgages can vary markedly over time and this is a trap when interest rates are low. A mortgage that is affordable at a low rate of interest may be beyond your means when interest rates rise.

It pays to divide your mortgage into several chunks over different terms, with some on a floating rate and the remainder fixed for different periods. This helps to minimize the risk of paying too much interest over the term of the mortgage or paying high penalties if you need to break your mortgage. If you are disciplined with your money, it can be helpful to have a line of credit that is only used in case of emergency. You will only pay interest on your line of credit if it is used.

Try and pay your mortgage off as quickly as possible by focusing on the chunks of your mortgage that are on a floating rate or fixed for a short term. Repaying debt should take priority over any long term saving other than KiwiSaver.

Mortgage Holidays a Last Resort

One of the biggest expenses in most household budgets is mortgage repayment, especially for young couples who have scraped together the minimum deposit to buy a house.

A big mortgage usually means a high level of financial commitment that leaves little room for saving. Without saving, unplanned expenses or unplanned loss of income can mean the difference between struggling by and financial crisis.

In the current economic climate, loss of income is a real possibility as businesses and Government Departments shed staff. When times are hard, a mortgage holiday can provide welcome relief.

Most banks have had a policy of offering mortgage holidays to people struggling to meet payments. Don’t think, however, that banks are motivated to do this purely out of kindness towards their customers.

Of course, there is an element of good will, but mortgage holidays are a good way for banks to avoid the expense of having to manage a customer who is behind on payments or, at worst, having to arrange a mortgagee sale.

They are also a way for banks to make more money, because throughout the period of the mortgage holiday interest on the mortgage keeps on compounding.

A mortgage holiday may be a good short term solution when money is tight, but in the long term it means that more interest is paid and the mortgage takes longer to be paid off in full.

Prevention is always better than cure and when you are taking on debt, don’t commit yourself to the extent that you have no room for saving.

Sometimes it is not the mortgage that is the problem but credit card and store card debt that gets out of control after the mortgage has been taken up.

Keep a lid on your commitments and make sure you have an emergency fund to tide you over when unexpected things happen.

If you have a change in circumstances, take action sooner rather than later. Review your budget and be prepared to let go of things that are costing you money and which you can do without until the bad times are over.

You should consider a mortgage holiday if

• You have reviewed your budget and still can’t make ends meet
• You have a large amount of credit or store card debt that is increasing because you can’t keep up the payments
• You are suffering from stress due to financial worries
• You feel confident that at the end of the mortgage holiday you will be able to keep up with your financial commitments.

Once you have arranged the mortgage holiday, use the spare funds to pay off any other debts you might have and, if there is anything left over, keep it on hand to cover unexpected expenses.

Whatever you do, don’t take a mortgage holiday so that you can spend more.

A mortgage holiday is a good way to avoid a financial crisis, but it comes at a cost and should be considered as a last resort.