What to do when you hit a financial cul-de-sac

Almost one-fifth of first-time buyers attracted by government grants during the global financial crisis face the prospect of losing their homes by the middle of 2013, according to a new report.

“Most people don’t realise that the average loan size is twice as big as it was in 2005 so many people are still mortgaged to the hilt,” said Martin North, director of research firm Digital Finance Analytics (DFA), who produced the research. 

Angus Raine, CEO of real estate firm, Raine & Horne, says the prospect of a wave of mortgage defaults is concerning, particularly against a backdrop of rising energy, education, food and childcare costs.

“To combat the potential hit of mortgage stress, I’d be urging households to use a budget to see where they are spending money and how they can trim costs,” he said.

“Any money this frees up should be used to help reduce any mortgage-generated stress.”

Homeowners are also being urged to pick up the phone to their lender early if they are experiencing financial hardship.

“Loan defaults are bad for business, so the banks will do whatever they can to help you avoid mortgage stress if you give them plenty of notice,” said Raine.

Michelle Hutchison, spokeswoman for financial comparison site RateCity, agrees: “Institutions will offer you options in times of financial hardship such as moving to repayments to interest-only for a while or extending the term of the home loan to lower your monthly repayments,” she said.

Alternatively, Hutchison says if your lender won’t play ball, consider switching lenders or loans.  

“There’s a wealth of competition in the market now and lenders are eager for your business so do your homework, compare rates using a site like RateCity and use this market knowledge to negotiate hard with your current lender,” she said.

“If they’re willing to let you, and you’ve got at least 20 percent equity, then there’s a good chance you’ll save some money by moving to a competitor.”

In fact, recent figures from the Australian Bureau of Statistics showed that a record 35 percent of all housing loans written in 2011/12 were borrowers refinancing existing mortgages with a new lender.

“Refinancing to a lower interest rate, through a site like RateCity.com.au, can potentially save you tens of thousands of dollars and liberate you from crippling financial hardship,” she said.

However, if you are still having troubles with your lender a financial counsellor may be able to help.

Many churches, charities and government-funded bodies have qualified financial counsellors who can help you out of a tricky spot and their services are usually free.

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