25th February 2010
Planning a family - plan your mortgage.
How can anyone afford both a big mortgage and a family? While lower interest rates have eased home-loan affordability, there's no question that juggling a mortgage and a family can be tough. Many first-home buyers in particular find they've just got on top of this
'making regular mortgage payments' routine, when they then have to turn around and ask whether they can do it on one income for a period of time.
That's why it's important that they start planning their financial situation early if they're thinking of starting a family. Building a buffer by making extra repayments is the ideal way to go. If the loan has a redraw facility or 100 per cent offset account, the borrowers can simply put in extra money now and use that buffer either to suspend or reduce their repayments when the time comes. Paying higher repayments now will also get them used to living on a budget. One strategy used by some couples is to live off one income even before they start their family and put the other partner's income straight into the mortgage.
That's fine for all those people who've planned ahead but what about those who were less organised? There are still plenty of options and borrowers should discuss them with their lender or mortgage adviser. Budgeting is going to be critical. Borrowers need to understand all the assistance they'll be entitled to - government benefits, holiday, maternity and long-service leave and any other cash they can get their hands on.
How effectively will this plug the gap while the couple is living on a reduced income? On the plus side (or downside given your point of view), they probably won't be spending a lot on lifestyle in the early stages of parenthood, though the new parents will have to meet other expenses such as medical care and items for the baby. Understanding how much money they'll need - and how much they'll have - will help them decide whether they can afford their current mortgage repayments.
What if the budget's looking a bit tight? Options open to the couple include a period of reduced repayments or even a repayment honeymoon. This will, of course, depend on how helpful the lender is prepared to be, but, even in these tougher times, most lenders are prepared to be more flexible with existing borrowers than they might be with new customers. It's in no one's interest for the borrower to default on their mortgage. Some people switch to a fixed-rate loan when they start a family to guard against interest-rate rises but that's not necessarily a good idea in the current economic environment. It might be worth considering fixing all or part of the loan, by taking into account the many considerations around the borrower's ability to meet the repayments and the likelihood of rate increases.
Borrowers should also beware of repayment honeymoons, where they stop making repayments entirely for a period of time. Being able to keep making payments in some form, even if they have to switch to making interest-only repayments, is a better outcome than making no repayment at all. Paying nothing for a long period may see the loan amount owing grow beyond the means of the borrower and they may end up going backwards.
Planning a family also means planning your financial situation as this exciting phase of life occurs.
Used with permission of Chris Acret - Managing Director, Smartline 2009
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Head of Lending
Iain Pepper is a Vice-President and the Head of Lending for the La Trobe Group.Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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