If you’re planning a family it’s important to think about more than the pitter patter of tiny feet. We explain how to manage your home loan, or apply for a loan, when you’re about to take time off work for a baby.
No matter whether you’re aiming to take a few weeks or several months off work for the arrival of your new baby, it’s worth thinking about how you will manage your home loan.
There are two sides to this coin – money coming in, and money going out. You need to know your likely income while on maternity leave, and explore different options to stay on top of your home loan once the baby arrives.
Understanding parental leave entitlements
On the income side of things, maternity and parental leave provisions can help make the financial side of having a baby more manageable.
Under the government’s Paid Parental Leave Scheme all employees in Australia, who earn less than $150,000 annually before tax, are entitled to parental leave if they have worked for their employer for at least 12 months.
If you’re the primary carer of your newborn you may get up to 18 weeks’ leave paid at the national minimum wage. At present that’s $695 per week before tax. You may also be eligible for paid parental leave from your employer. It is possible to receive both, and this is definitely something to check with your employer.
Dads and partners including same-sex partners can also be entitled to a fortnight’s leave paid at the national minimum wage.
The bottom line is that you may still have money coming in while you’re on maternity leave though perhaps not at your usual pay rate.
Managing your home loan
The next step is to think about how you will manage your home loan while you take time off to be with your baby.
It’s an area where your Aussie Broker can lend a valuable helping hand however the key is to be upfront with lenders, no matter whether you’re applying for a loan or you already have a home loan in place.
Keep lenders in the loop
You can certainly apply for a home loan when you’re about to have a baby, but it pays to be upfront with lenders about your situation. Aiming to have evidence of savings, other investments that can provide a cash flow while you’re on maternity leave, and a clear plan of how you will manage your home loan repayments before you return to work may support your application.
From here it’s a matter of checking out different strategies to manage your home loan when the baby comes along.
Take a repayment holiday
If you’ve had your home loan for some time, you may be able to take a “pregnancy pause” or repayment holiday, which gives you a break from loan repayments, or at least make reduced repayments, for a set period. Strict conditions can apply and these vary between lenders so it’s definitely an option to talk through with your Aussie Broker.
Put redraw to work
Making extra repayments on your home loan before you head off on maternity leave lets you build a buffer of funds in your home loan. It’s money that may be used to make loan repayments via redraw when you’re on maternity leave.
Save hard into an offset account
If you have a home loan offset account, try aiming to save as much as possible in the linked account. This may help to reduce the interest charges on your loan while you’re still on normal pay, and funds accumulated in the offset account may be used to make home loan repayments while you’re on maternity leave.
Review your current loan
It makes sense to review your home loan before you take time out for your baby to be sure you still have the loan that’s right for you. It’s especially important to be sure you’re paying a competitive rate if your household income will drop while you’re on maternity leave, and that your loan offers the flexibility you may need during this period.
Your Aussie Broker can assess whether you could secure a more competitive rate, or if switching to a fixed rate home loan is the right move. It could give you the benefit of stable repayments for the duration of the fixed term.
Or you may be able to free up some cash with an interest-only home loan. A clampdown on these loans by lending watchdog APRA means it can be harder for owner occupiers to secure interest-only repayments and your interest rate will likely be higher than on a principal and interest loan, but your Aussie Broker can explain the pros and cons.
Talk to your Aussie Broker today to see what’s involved in applying for a home loan when you’re expecting a baby, or managing your home loan while you’re on maternity leave. A bit of forward planning could give you the best of both worlds – a new bundle of joy and a home loan that fits seamlessly into family life.
This article was originally published in November 2014.