To successfully manage your mortgage repayments and avoid defaulting on your loan, you need to integrate your mortgage into your life completely and make sure that every aspect is directed towards managing your spending and your budget to maintain the security of your family home. Therefore, to avoid defaults on your mortgage repayments, which can put a mark on your credit history, put your home at risk and potentially add expensive fees or higher interest rates to your loan, take the following holistic approach to managing your mortgage.
Be Familiar with your Mortgage
You can’t cook a meal from scratch unless you know how all of the ingredients interact, you can’t drive a car safely unless you know how the brakes and steering react and you can’t manage your mortgage successfully unless you know about all of its features. Therefore, the first step in avoiding a default on your mortgage is to know the type of mortgage you have. This may mean getting out all of your loan documents, or putting in a call to your lender.
The most important thing to know about your mortgage is the type of interest rate you have, because the interest rate will affect the repayment amount. For example, you may have a fixed interest rate which means fixed repayments, but also means you don’t benefit when interest rates go down – however, you are protected when interest rates go up. You can usually choose from an interest rate which is fixed for the life of the loan, or one which is fixed for a certain period, and then reverts to a standard variable interest rate.
The alternative is a variable rate home loan which means your interest rate is always variable so your repayments could change from month to month as official interest rates change and your lender reacts. In return for having the benefit of an interest rate which could go down, you also have to be prepared for an interest rate which may go up as well.
When you know what your repayments are likely to be doing in the future, you are better able to budget for these changes, or lock in the stability. If you think you are at risk of defaulting on your loan because of the unpredictability of a variable rate, speak to your lender about entering a fixed rate period. Or if you are struggling with repayments which were fixed when interest rates were at their peak, find out whether you can make savings by switching to an adjustable rate mortgage.
To make sure you can manage your mortgage repayments you need to avoid taking on too many other debts. All other debts and expenses will take money away from your home loan and put you at risk of defaulting on your repayments because your budget is stretched too thinly.
If you do already have other debts such as a line of credit or a credit card, avoid using these forms of finance to get you out of a financial tight spot because as soon as you start running up other debts you have greater interest charges to pay and you risk defaulting on these other unsecured forms of finance too. If you default on your credit card it will not only affect your credit rating but you will be charged excessive fees, and you don’t want your finances to be distracted from repaying your mortgage just to cover your short term splurges.
With more and more debts you can easily lose track of your repayments which makes it easy to fall into default. Therefore, don’t apply for new debts, extend your credit limits or spend up to your credit limits and you will more easily be able to remain in control.
Budget and Repayments
To help you remain on track with your repayments you need to make sure you are monitoring your budget regularly. This doesn’t mean just pulling out your spreadsheets at the beginning of each financial year when your finances are in the front of your mind, it means looking at your income and spending monthly to make sure you always know what is going on. This means that when those times of extra spending come around such as holidays or birthdays, you know exactly how much you can spend and you don’t risk overspending and having to endure a financial hangover later.
Also, by keeping your budget up to date, you can look back at how you have been spending your money and make some predictions for the future – or better yet, avoid making the same mistakes you’ve made in the past. Then, when you are in control of your budget you’ll always be able to make your home loan repayments a priority, and you won’t have to worry about being in default.
You can also set yourself a financial buffer with your home loan repayments if you recognise that interest rates will always fluctuate and so will your loan costs. Therefore, calculate what you would have to pay if interest rates were one to two percentage points higher than they are today, and start paying that amount into your loan. In this way you create a buffer of additional repayments, you reduce the interest you pay and your loan term, plus your budget is already prepared for the inevitable interest rate rises so you’re not taken by surprise and forced to default on your repayments.
You can then set up an automatic transfer of your repayment amount on the day your wages are paid into your account. This means you don’t have to remember to make the payment and you never have to worry about missing a payment.
Know your Rights
If you are behind on your repayments you may not automatically default on your loan and lose your home. Instead, if you are struggling to keep your budget on track and meet your home loan repayments there are other options, for example you may qualify for a home loan modification if your home is your primary residence, your repayments are more than 31% of your income and you are suffering financial hardship and are unable to meet your repayments.
All you need to do is contact your lender and ask them about assistance for financial hardship and whether they can help you organize a home loan modification to make your repayments more affordable.
Your Lender’s not the Enemy
It is important to remember that your lender doesn’t want you to default on your loan because this will cost them time and money to repossess your home and recoup their losses from your loan. Instead, if you are struggling with your loan contact your lender and find a repayment agreement you are both happy with.
When you contact your lender they are likely to ask you some of the following questions, so have your answers prepared before you make the call:
What happened to make you miss your mortgage repayments?
Do you have any documentation which will back up your explanation for falling behind on your payments?
What have you done to try and resolve the problem?
Is your problem temporary, long term or permanent?
What do you see changing in your situation in the short and long term?
What are the other financial issues stopping you from getting your mortgage repayments back on track?
What would you like to see happen? For example, would you like to keep your home, and what sort of payment arrangement is realistic?
There are four main options which can help you get back on track with your mortgage repayments:
Reinstatement. This is when you agree to pay the entire overdue amount plus any late fees and penalties by a certain date.
- A repayment plan. You pay off the amount by which you are behind by adding a little extra to each of your regular monthly repayments and is usually a good option if you have only missed a few payments.
- Forbearance. Your repayments are reduced or suspended for a certain amount of time, after which you resume your regular repayments and make a lump sum payment or higher repayments to bring the loan current.
- Loan modification. Your lender permanently adjusts the features and terms of your loan to make them more manageable. This could include switching from a variable to fixed interest rate or extending your loan term.
You can also seek credit counseling if you are struggling with your home loan repayments. A counselor will assess your situation, answer your questions and explain your options. Your counselor can also help you prioritize your debts and help you prepare for negotiations with your lender. Housing counseling or credit counseling services are usually free, or come at a very low cost.
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