Australia's inflation rate of 1.6 per cent may seem low, but over time rising prices can inevitably put pressure on homeowners to keep up their mortgage payments while balancing their overall budgets.
Missing a loan repayment can mean more than just paying late fees and additional interest. It can also result in a black mark being placed against your credit history, making future borrowing more difficult, and repeated issues could ultimately lead to you losing your property.
When applying for a mortgage it is paramount that you only borrow what you can afford to pay. Generally it is unwise to be making repayments which are greater than a third of your household's take-home pay.
Even if the numbers initially look comfortable, interest rates can quickly rise and throw a well-planned budget into disarray. For instance, a 0.25 per cent rise on a $500,000, 30 year mortgage at 7% can translate to an $84 increase in monthly repayments. Some loans also have introductory rates that lead to significant increases in repayments once that period expires.
Hence it is a good idea to budget for an interest rate much higher than what you will be initially paying. You can always save the difference to create a buffer, or tip it into the loan to pay it off faster. This may also prove useful should one of the income earners suddenly lose employment.
It's important not to count credit cards as a buffer when things get tight. Putting household expenses on credit simply delays their real payment, and can leave you paying higher interest rates on a mounting pile of debt. It may ultimately be worth making some lifestyle changes rather than risking your credit rating or losing the property itself.
A Mortgage Choice broker can help you determine how much you can safely borrow. And if you are concerned about your ability to repay an existing loan, it is important to speak to your broker as soon as possible, as they can provide smart advice on managing your repayments, and may also be able to negotiate a better arrangement with your lender.