Q: I can comfortably afford my mortgage now, but I know interest rates are really low so I wonder what would happen if they rise significantly, or what if I lose my job, or worse? How can I protect my family, and my home, if I can’t pay my mortgage?
A: The cash rate has been at a historic low for well over a year, and even more so after the Reserve Bank cut rates by 25 basis points in its first meeting of 2015. So to think that eventually they will start to move up is logical and realistic.
Unfortunately there isn’t a type of insurance that protects people against interest rate rises, but when your home loan serviceability was worked out, a good mortgage broker should have included a buffer, generally 2%, which allows for interest rate rises.
There are a couple of things that can temporarily help.
Fixing your interest rate
If you want to protect yourself against rising interest rates, at least for a set period of time, fixing your interest rate will give you certainty about your interest rate and repayments for the fixed term. There are some really sharp fixed rate home loans available at the moment, with more and more lenders dropping their rates too.
Interest only home loan
If it’s affordability for a period of time that you are worried about, switching your home loan repayments to interest only from principal and interest may help. I’m personally not a big fan of owner-occupiers paying interest only, but there are different advantages and disadvantages to interest only home loans.
There are also a couple of ways to protect your ability to repay your home loan for various reasons.
Mortgage Protection Insurance
Mortgage protection insurance provides financial assistance if you can no longer work due to involuntary unemployment, illness, injury or worse. Some policies allow two people to be covered, and you can often select your insurance premium based on your budget, cover amount, age, gender and smoker status. You can also usually adjust your level of cover as your circumstances change.
Life insurance is important whether you own property or not, but it is another way to help protect your home should the worst happen. Many people have some life insurance through their superannuation and this is what they plan to pay off the mortgage with if they die, however it’s often not enough to payout their mortgage in the case of death. Unfortunately, it’s a well-known fact that the majority of Australians are under insured.
Do you worry about not being able to pay your mortgage? Tell us what strategies you are using to protect yourself in the comments below.
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