When she should have been feeling excitement, Rebecca* was stressed. With just three weeks until she gave birth to her second child, the contract worker was soon to be without a wage for 12 months and facing the possibility that she and her husband would struggle to afford their monthly home loan repayments.
They already knew it would be a stretch surviving on one salary, but what about the renovations they needed for their growing family? What if they had to deal with other costs – medical bills, child care? In looking at refinancing options, she was frustrated having to deal with different organisations, different people, different systems and different application processes.
Rather than relaxing ahead of the big day, Rebecca was worried she might end up losing her home.
It’s an issue facing every working couple wanting to start or build their family – meeting their financial obligations, especially their home loan repayments, on one wage. It’s not an isolated issue, either. The most recent Australian Bureau of Statistics figures (from November 2011) showed that more than half a million Australian women had a child under two. Tellingly, more than two-thirds of these were working women, earning a wage that wasn’t likely to be fully substituted by their employer or the Federal Government’s paid parental leave scheme.
Tim Bowcock from unohomeloans.com says home loan borrowers can avoid such anxiety by planning ahead. “It’s important to think deeply about where someone is in their cycle of life,” says Bowcock, who has led financial and technology teams for three decades. “If they’re at the stage where they have young children, they’re probably still building their family. The possibility or perhaps likelihood of another child should be factored into the loan structure.”
Bowcock says it’s important to build in a safety margin so that extra funds are available to cover anything unexpected. Bowcock advises that “it’s about choosing the right home loan in the first place”.
“You may be able to use different interest-rate types that allow some predictability of the repayments, as well as features that allow ‘repayment holidays’ if you’re in advance of the repayment schedule,” he says. “For a one-off fee of less than $100, some lenders will grant a repayment holiday for six months. One lender allows repayments to be reduced by as much as 50 per cent after the birth of a child, whether you’re in advance of your repayment schedule or not.”
An offset feature, where a bank account is linked to the home loan account, can serve as a financial buffer while reducing daily interest costs. A redraw facility can be used to repay more than the minimum repayments when you’re both working, then access these funds as required and often with no fees at all.
Another option, Bowcock says, is to have a split interest-rate loan – partly fixed and partly variable. “This gives you the benefit of being able to repay part of the loan faster than the repayment schedule to reduce daily interest costs while managing interest rate sensitivity. That split concept also applies to offset accounts, and there are even lenders that allow 100% offset for both fixed and variable interest rates.
“Plan appropriately and make sure you speak to someone who is giving you good, honest advice that’s in your best interests.”
If possible, prospective borrowers planning to grow their family should apply for their home loan while both parents are working, unless one wage is enough to gain approval. But what if a couple already paying back a loan know they will soon be one salary down, even for a short time, and their ability to make regular repayments could be at risk?
Bowcock says in these circumstances it’s important they speak to their lender as quickly as possible. “No lender wants to see the foreclosure on any property,” he says. “There’s always a way – it doesn’t matter what the situation is. The main thing is to talk to someone early, and talk to them openly, and to have your documents ready to verify your story.”
ASIC site MoneySmart has a handy parental leave calculator that works out how much income will be available during this time. You just need to know your salaries, what other income you may earn, and what you’re entitled to get from your employer and the Government. The site also has a handy budget planner.
To her credit, Rebecca had researched her refinancing options. She chose an offset account because it allowed her to build a safety buffer for unforeseen costs while offsetting the interest being charged on the home loan.
Bowcock says this gave Rebecca a ‘best of both worlds’ solution. “They had extra cash available and the situation covered, but weren’t paying extra. It’s a time when you want to be focused on your family, not your finances.”
*Not her real name
- Know where you are in your life cycle, make allowances for things that may happen and have a financial buffer so funds are always available.
- If you’re likely to be taking parental leave, research the best home loan options and features and speak to trusted advisers.
- If you discover you will be down one salary for any reason, speak to your lender as soon as possible and discuss a contingency plan.
Image via Style Arena.