September 01, 2013

Put your money where your mortgage is - How to avoid arrears like your house depends on it

A mortgage is for most people, probably the biggest financial commitment you will ever make in your life. When you fall behind in payments the consequences can be nasty. All too often people ignore the problem and berry their heads in the sand, but if you know you’re going to fall behind with your mortgage, acting now can save you a whole lot of misery.

Over the long term, arrears can become home threatening, often ending in repossession or various levels of court action. Situations can easily escalate and the sooner you act the more options are available. If you think you may struggle with mortgage repayments, here are some tips on what you can do to avoid arrears and repossession.

Apply for Temporary Change to an Interest only Mortgage 

If you just need some breathing room in the short term, try switching from repayment to interest-only mortgage with your lender. This will substantially reduce your payments but remember, this should only ever be a short term measure. As has been seen covered in the press lately, an interest only mortgage still has the balance of the property left needing payment at the end of the term. If you go interest only, you are no longer paying off your debt and it is important to switch back to repayment as soon as financially possible.
Switch Mortgages

This is the simplest approach you can take, if you have the equity and the credibility. In this day and age you must find a way to borrow smarter, otherwise you can be hit where it hurts the most, and that's the pocket! Finding a mortgage on a better rate is the most effective way to cut outgoings, but you do need to move quickly to get the best deals and consider whether it will help or not.
Borrowers with more than 20% equity should be able to access good mortgage rates, while those with less could improve on their current deal, depending on the rate they currently pay. It is always worth checking with your lender, then checking the market as a whole for the best deals. Independent mortgage brokers can be good here, especially if you do not have a good credit history.

Extend the Term of Your Mortgage

If you increase the period over which you are paying back your mortgage, you can reduce your monthly repayments. This does however commit you to the debt over a longer period of time. Most repayment loans are structured on 25-year terms. A little capital is repaid alongside the interest each month to chip away at the debt. Extending the term reduces the amount of capital and can make rising interest rates more manageable.  If your situation improves over time, there is always the option to shorten the term. It is also far better and more responsible to extend your mortgage than fall into arrears.

Sell Up and Downsize

OK so this may be the last thing you wish to consider. But if your situation is drastic and you have exhausted all other possibilities, can you really afford the home you’re in?

Downsizing may seem drastic, but it might be a good option for you. It could mean either taking a new mortgage or repaying some of your existing one and moving into a more manageable and appropriate property.

You should make sure you are clued up on whether you will have any early repayment charges on your existing mortgage and the cost of moving respectively, when assessing if this scenario would be to your benefit or not. Downsizing may not be right for you, in which case maybe you would need to consider selling up, repaying the mortgage and banking the rest of the equity taken from your home. Keep it safe for a while until the market improves, your finances are healthy and you are ready to climb back onto the ladder from where you left off rather than from the bottom again.

About the author: This Article was written by Tomas Cunningham, a mortgage broker from Sydney, Australia who spends most of his time helping people get the right mortgages and writing a book on frugal living in the city.

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