Your emergency coping plan for higher mortgage payments

Are higher mortgage repayments now sucking serious spending capacity from the other aspects of your life? Because it seems like they are for pretty much everyone, everywhere.

Airlines suddenly have empty seats. Holiday accommodation vacancies are up. Cruise liners are running sales. Retailers of everything from clothes to couches report quieter sales. Even some landscapers and builders, the big benefactors of the crazy COVID years, are scrambling for work.

This month’s 25-basis-point interest rate rise is another blow to struggling mortgage holders.Credit:Dionne Gain

And with this month’s 25-basis-point interest rate rise hitting your hip pocket, possibly as early as last Friday, it may be time for some emergency mortgage action.

If you think it’s time to act, apply these three strategies in this exact order.

Coping strategy 1: Ask your existing lender to ease up.

Simply pick up the phone and say: “I want a rate reprieve or I’ll walk.”

Or even call their bluff and submit a “mortgage discharge form” naming another, cheaper, lender – this approach may well yield better results and save you a hard negotiation.

The fact is that though the Reserve Bank might be tightening our rates, lenders are today loose with the discounts.

Such is the war for our home loan business they are also giving cashbacks of up to $5000 to entice new customers (but remember, it’s the ongoing rate, not the one-off incentive that matters).

I write today, however, assuming you might not qualify for a new loan. That you are cutting back everywhere because the budgetary buffer a lender initially built into your finances is gone. They have been required to stress-test new loans for a full 3 per cent of increases since shortly before the Reserve Bank’s 3.5 per cent hike cycle began.

The thing is: your lender won’t realise you are stuck with them – that term ‘mortgage prison’ – unless you tell them, or you try and materially change your loan conditions and they have to do a fresh serviceability assessment.

Interest rates may be rising, but the big banks are competing with discounts and cashback deals.Credit:Ryan Stuart

Turn that to your advantage with this knowledge: the average big four undiscounted variable rate, before the latest rise, was 6.5 per cent, though you can expect that to increase by another 25 basis points if it hasn’t already.

But if you have equity of 40 per cent or more, even the rates the big banks now disclose are as low as the Commonwealth Bank’s 5.32 per cent.

Now, banks are trying to reserve these great deals, too, for shiny new borrowers.

Though the Reserve Bank might be tightening our rates, lenders are today loose with the discounts.

So tell them in no uncertain terms you know you could be paying as little as 4.97 per cent for a quality, comparable product with a genuine offset account – that’s your benchmark and the rate that today you could name on a mortgage discharge form (it’s from Bendigo Bank and is available with just 20 per cent equity too).

If, from this starting strategy, you can shave 50 basis points off a $600,000 loan that is currently 5.5 per cent, you’ll save $177 a month. It’s good progress. But if you need to save more, the next thing to do is:

Coping strategy 2: Ask to go interest-only

By, in essence, parking your borrowings for a bit, you can ensure they do not grow, but your repayments become super low.

That $600,000, 5 per cent loan above, for example, goes from costing $3508 a month on a principal-and-interest repayment basis to just $2500 on interest-only.

The question is whether your lender will let you go interest-only. These loans have been on regulators’ radars for the past few years as, ideally, you should instead be chipping away at debt.

But all you can do is ask. If they acquiesce, there’s also a further vital question: “What happens to any extra money I have sitting directly in my loan? Any over payments that I am hoping to redraw at some stage?”

If the answer is that these will be sucked up in a calculation of a whole new loan balance, and if that money is intended for other purposes, get it out first.

If all that fails to ease your financial pressure enough:

Coping strategy 3: Ask for financial hardship.

By law, financial institutions must have teams dedicated to giving concessions to customers who are struggling.

As counterintuitive as it might seem, stick your hand up and admit if you are in danger of missing a mortgage repayment, though withdraw any excess money/savings that might be sitting in your loan first.

Think of it thus: Confessions get concessions. Or they do if you can convince your lender that your situation is just serious in the shorter term. They want their money eventually!

Don’t miss that most of the measures to help will actually mean they get more of it – it’s not entirely benevolent.

In any case, the concessions might include a (further) dropped interest rate, fresh 25 or 30-year loan term (meaning instantly lower repayments) or a full or partial repayment holiday. Or a combination thereof.

The new, positive development is that no longer can repayment holidays blight your credit score.

When they were doled out freely during the pandemic shutdown, there was no legislation specifying that these ‘missed repayments’ could not be recorded on a credit report. Now there is.

Nothing will appear on your report, but a note that you are under a financial hardship agreement will, and only for one year.

So, yes this is a final resort but, right now, it could be the emergency assistance you need.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

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