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Managing Your Mortgage

Young family outside house

In a country where the Great New Zealand Dream is to own your home, mortgages are always front page news. Every interest rate increase (or decrease) is reported and families wait anxiously to find out whether the news is bad (or good). Given that each rise of 25 basis points adds $50 to the average mortgage repayments, that anxiety is understandable.

Managing your mortgage is not always easy, particularly when it feels as though you’re reliant on the whim of the banks. But taking control of your home loan is often the first step. Rather than waiting for interest rates to rise around you, take ownership of your loan and be proactive. We asked the experts for the top 5 tips for managing your mortgage.

1. The best way to manage your mortgage is to ensure you have the right mortgage. If you are looking at buying a house, the time to research mortgages is now. Before you buy. Don’t just look at what your current bank has on offer – visit websites such as www.canstar.co.nz, which rates home loan packages against one another, or contact a good mortgage broker for advice. “The best brokers are experienced and offer loans from a mix of traditional (banks, building societies and credit unions) and non-traditional (wholesale or non-conforming lenders),” says Alex Brooks, author of Mortgage Stressbusters (Wiley) and www.renovationplanning.com.au.

Remember, when you’re comparing loans not to take the interest rate advertised at face value.

“Always check the comparison rate,” says Brooks. “This rate tallies up the fees, charges and hidden costs over and above the monthly interest charge to show the real figure.”

2. If you already have a mortgage and are beginning to feel the squeeze of recent interest rate rises, don’t panic. “There are plenty of options to explore, everything from refinancing with your current lender to looking at other options” – says Kristy Sheppard, senior corporate affairs manager for Mortgage Choice, Australia’s largest independently owned mortgage broker (www.mortgagechoice.com.au).

For Sheppard, the first step is to look at your family budget. “If you have a variable interest rate, this is vital,” she says. “Those with fixed interest mortgages are not affected by rises, so their repayments won’t change. But if your loan has a variable interest rate, you need to look at you’ll incorporate recent interest rate rises, as well as other increases over 2011. You need to build a buffer.”

Both she and Brooks suggest that paying off credit cards and other high-interest debt should be your first port of call. “Increased personal debt is a major cause of mortgage stress,” says Sheppard.
You’ll find some great family budget tips here {link to family budgeting page} and a family budget planner here {link to family budget planner}.

3. If things are a struggle, your first port of call should always be your current lender. “Try renegotiating your loan,” says Sheppard. It’s amazing what a phone call can do. For example, a recent survey of around 2000 people by Choice, the consumer advocacy group, reports that around a third of them had asked their financial institution for a cut in interest rates or transaction fees – and most were pleasantly surprised, receiving cuts between 0.25 and 2 per cent! It’s definitely worth opening your mouth.

4. If you have no luck there, the next step may be restructuring your home loan. This may mean incorporating in full into the loan any dollars that you have in your redraw (lessening the repayments), or it could mean extending your loan term. “If you choose this option, it’s worth remembering that while repayments drop in the short term, you will incur more interest in the longterm.” In other words, you will end up paying more over the life of your loan.

Depending on your situation, you could apply to change your credit contract with a Hardship Application under the The Credit Contracts and Consumer Finance Act 2003 on the grounds of a “unforeseen hardship”. If your financial difficulties are a result of illness, unemployment or another reasonable cause, the lender may agree to vary the terms of your contract and, perhaps, stop charging you interest for the specific (short) term of the hardship variation. Note that they are not obliged to do this, and you will end up paying extra interest as the terms of the overall loan are likely to be extended as a consequence of any variation.

There are some terms and conditions to hardship applications, for further information visit the NZ Consumer affairs website.

5. Refinancing is a term that’s bandied about a lot in times of rising interest rates. But Brooks and Sheppard agree that it should be approached with some caution. “For some people, refinancing is a better option than extending the loan term,” says Sheppard. “But consider all options. Especially the costs versus the benefits.”

Break-out costs and exit fees are things we never consider unless we come to a refinancing decision. But Brooks believes they’re something that we should look at right from the start. “they’re hefty fees and are quite commonly only discovered when you go to refinance the loan,” she says.

The cost of these fees may be such that it will take the borrower many years to recoup any savings from a lower interest rate in a different loan, so check them carefully.

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