The promise of the pitter patter of little feet is a wonderful and exciting thing for expecting parents. The often-accompanying ringing of cash registers – not so much.
A study in 2002 by NATSEM (National Centre for Social and Economic Modelling) revealed at that time, that the cost of raising a child from birth to age four was $102 per week on average. The cost increased with the age of the child. For the average couple with two children, those children ‘cost’ 23 per cent of their estimated average gross income.
A big concern for many new parents is how they will afford the mortgage – particularly if they are dropping from being a double income household to a single. But there are ways to keep financial stresses to a minimum so you can focus on what’s more important.
David Lock, State Manager for SA and WA at Aussie suggests sitting down with your mortgage professional and “looking at ways to potentially restructure your mortgage or make adjustments to it for a period of time to provide you with the cashflow and also the breathing space through that maternity leave or through that period.”
Options that may provide breathing space include redrawing available funds if you have any and if your mortgage allows redraw, or switching from principle and interest payments to interest only to reduce the monthly payment commitment. Lock explains, “If they’ve got [some extra money], they can add that back into the loan and pay it off the principal. So your commitment is less but you still have the ability to pay more.” Lock says that this strategy is available on many loan products today.
But Christopher Zinn, spokesperson for Choice consumer group, warns that for owner-occupied debt, interest only payments should be a short term strategy. “The best thing you can do is pay down that principle as quickly as possible,” he says.
“Another option is to refinance the mortgage in such a way that the repayments are less, but that comes with costs attached,” says Zinn.
Take a look at your current interest rate and compare it with others on the market. A borrower with a current loan of $300,000 at an interest rate of 6.60% could potentially save hundreds of dollars in repayments by refinancing the loan at a lower rate. Online tools such as Aussie’s 1 Minute Mortgage Explorer can help you calculate the difference, but remember to also factor into your analysis exit fees on your current loan plus application and ongoing fees on the new loan.
Should you fix your loan?
“The question I ask people is when you put your head on the pillow at night, what thought comes into your head – is it saving $10 on your interest rate? Or is it knowing what your next repayment’s going to be?” says Lock.
“If you’re going into an environment where you’ve got reduced incomes and cashflow’s going to be very tight, at least hedging your bets with a split of variable and fixed is a good way to protect yourself,” suggests Lock. He says that a discussion with your mortgage professional is the best place to begin.
Take advantage of grants and benefits
There is some financial help at hand, and depending on your or your partner’s work arrangements and annual income, you could qualify for some handy benefits, such as:
- Baby bonus – currently a $5,185 one-off payment
- Paid parental leave (Government scheme to begin in 2011)
- Other family assistance – family tax benefits, child care rebate
At work, understand your options for taking paid time off (parental leave, long service and annual leave) as well as returning to work, and factor this in to your mortgage strategy.
Analaura Luna, co-author of Your Family, Your Money says, “Putting your finances into order very early in the piece – as soon as you’re aware that you’re pregnant will give you a heads up as you’re approaching maternity leave.”
Luna’s website yourfamilyyourmoney.com.au features an eight month finance plan for expecting parents, which suggests creating breathing space as early as possible. “Start looking at ways to generate new income,” says Luna. “In the lead up before you go off on maternity leave start looking at maybe picking up some overtime hours… maybe you have things to sell. Look at your investments and whether you can move accounts to higher [interest] paying accounts – those sorts of things will really help.”
Lock suggests planning for parenthood by cutting back on some luxuries and putting every spare dollar into the mortgage. “You really want to be doing these things well and truly before the birth of your child so that you can spend that time stress free and not making a decision then when the pressure is already on.”