By Loretta Tenaglia, Mortgage Choice in Parramatta
Mortgage Choice broker and mother of four Loretta Tenaglia looks at why the arrival of children should bring important plans to a household as well as joy, a few sleepless nights, and the patter of tiny feet.
Kids are great. As a parent, I cherish being able to watch my children flourish from tiny tots to teens, and ultimately independent adults. However as a mortgage broker, I am surprised at the way parents-to-be often delay making plans to manage their mortgage on a reduced household income.
Taking care of a newborn baby can be a stressful experience. Broken sleep needs to be juggled with the demands of the baby, and adding the financial stress of paying off a home loan on one income – even if it's only for a few weeks, can create a cocktail of exhaustion and uncertainty for first-time parents.
It is worth putting plans in place to manage your mortgage long before maternity leave rolls around. One sensible strategy for expecting parents to consider is to tip as much money as possible into the home loan ahead of the baby's arrival.
Making supersized loan repayments helps to reduce the monthly interest charged on the loan amount and helps to pay off the loan sooner. Just as important, it also provides a buffer of cash that can generally be redrawn if needed when one partner takes time out of the workforce.
The weeks leading up to the baby's birth provide an opportunity to make adjustments to your mortgage, which can make the loan more manageable once your newborn arrives. It may be possible to restructure at least part of your loan to accommodate interest-only payments, which will reduce the monthly payments but they will not reduce the loan amount. There may also be a cost involved to switch your loan from principal and interest, to interest-only. Some lenders may even offer a repayment pause if you are ahead with your loan.
As new parents, it can be tempting to lock your repayment amount by settling into a fixed interest rate. However, this is a step you should consider with care. If concerns over the possibility of rising interest rates are likely to keep you awake at night, then fixing may be worthwhile. Or, if you're not confident your household budget will extend to keep up variable rate loan repayments while your spouse is on maternity/paternity leave, it could be worth shopping around to see if you could save with a fixed rate. In both cases, your broker can help you weigh up the pros and cons of each loan type based on your circumstances and needs.
Finally, any major change in life provides an ideal time to reassess your home loan. This is especially the case with the arrival of children as you may find the loan features you wanted when you were a twosome can change when the family becomes a trio. Make a date to speak with your lender or broker – you could find your current loan is still the best choice, but if your mortgage is no longer competitive, refinancing to a different loan could produce savings at a time when every penny counts.