If you are struggling to keep up with your mortgage payments or just need to minimize your monthly expenses for a while, then you might need to apply for a mortgage repayments reduction.
There are a few ways to pay less on your mortgage. You can switch from fortnightly payments back to monthly which brings the total annual repayment down a bit because instead of making 26 forntightly repayments each year you can make 12 monthly repayments. The fortnightly option is essentially like you paying for a 13th month each year.
Another way to minimize your repayments is to extend the term of your mortgage. Let’s say you’ve had your mortgage for 8years and it was orinigally set up on a 30 year term. You have been making principal and interest payments regualrly without missing any. If life has thrown you a curve ball and now you need to bring your outgoings down as much as possible, you might decide to combine the mortgage top up strategy with the loan extension strategy.
You can extend your loan terms back out to 30 years and get some breathing room because you have spent time building up equity already. Now, if you have just lost your job, it is harder to do this because your bank is going to want to see that you have the income to support new and current debts. That’s why it is good to plan for this in advance and think about having mortgage interuption insurance or income protection before that all happens.
It never hurts to ask a mortgage adviser what your options are.
Interest Only loans are also an option. Perhaps you’d like to switch your principal and interest loans which shorten the loan terms each time you pay, to an approach where you are paying the minimum. This is when your debt does not get smaller, you simply pay the bank for the privilege of them lending you the money. Say you have $500,000 of mortgage debt, and your interest rate is 5%, then your annual interest expense will only be $25,000 instead of a higher number (depending on loan length and repayment method). Principal and Interest payments are more expensive but allow you to build up more equity. Using interest-only loans are usually for investment properties and rely on capital gains for equity growth.
You can also apply for a mortgage holiday in times of distress. This is a case by case basis. One thing you might want to do is pay a little more than you have to on your mortgages when you start and build up a buffer that if this every becomes your only option then at least you have equity to use. In some cases the bank will force you to sell your property.
If you’d like to reduce your monthly expenses, even if you are just curious about seeing the options, we won’t tell your bank (or anyone for that matter), and we can workshop your options with you. iRefi.co.nz is a free service – we do not pass judgment and will be encouraging you every step of the way.