27 May 2009

Other things to consider if you’re struggling with your mortgage repayments

Change your mortgage to an interest only loan for a few years

On a $300,000 loan at 8.33% the repayments on a principal and interest loan are $2,381.41, and on an interest only loan they are $2,082.50 saving $300 per month. Remember that if you choose an interest only loan you will not be paying any principal off your home, so don’t leave it too long before you sort out your budget and get back to paying off your principal as well.

Refinance to an Equity Finance Mortgage (EFM)®

An EFM® (which can be held for 25 years) allows you to borrow up to 20% of a property’s value interest free. There is no annual percentage rate applicable to the EFM portion of the loan unless you are in default. You are not required to make any regular monthly interest repayments on the EFM portion of the loan. Instead, when you sell the property or repay the EFM for some other reason, you repay the EFM amount you originally borrowed plus up to a 40% share of any increase in the value of the property. And while nobody likes to talk about property values decreasing, if this does happen when you have an EFM and you are selling your property, you may not have to repay the full EFM loan amount – a feature unique to an EFM.

This could be one way to save your home. Why not let the financial institutions help you for a little while? Please be warned, this loan is not suited to everyone so make sure you get the right advice and all the details before signing anything. There may also be entry and exit costs (penalty/early repayment fees) associated with refinancing your loan. This will also need to be taken into account if considering this option. Talk to us first about the benefits and consequences of the EFM loan.

Fix the rate for a couple of years

Most fixed rates have factored in future interest rate rises. However if you need peace of mind, help with budgeting and knowing your actual monthly repayments, then this option may suit you.

Line of credit

If you have equity in your home you can apply for a line of credit (LOC) to help get you through a couple of years of high interest rates. For example, if your home is valued at $500,000 and your debt is $300,000, you have equity available that can be borrowed against for other uses provided you can still service the repayments. This works by using the line of credit to pay the shortfall of your mortgage repayment. The interest will be capitalised in the LOC until you start repaying the debt.

Take a repayment holiday

If you’re ahead on your loan repayments why don’t you take a repayment holiday? Some institutions allow you a period of time where you do not have to pay your usual monthly mortgage payment if you are ahead on your repayments. This money could be better used to pay a consumer debt, maxed out credit cards or unexpected bills.

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