Alex Brooks

MORTGAGESTRESSBUSTERS

First published 2009 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Offi ce also in Melbourne

Typeset in Gill Sans 10.5/13.5pt

© Alex Brooks 2009

The moral rights of the author have been asserted

National Library of Australia Cataloguing-in-Publication data:

Author: Brooks, Alex.

Title: Mortgage stressbusters / Alex Brooks.

ISBN: 9780731409877 (pbk.)

Notes: Includes index.

Subjects: Mortgage loans — Australia.

Housing — Australia — Finance.

Dewey Number: 332.7220994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for

example, a fair dealing for the purposes of study, research, criticism or review), no

part of this book may be reproduced, stored in a retrieval system, communicated

or transmitted in any form or by any means without prior written permission. All

inquiries should be made to the publisher at the address above.

Cover design by Popomo

Cover image © iStockphoto/Ian Jeffery

Printed in China by Printplus Limited

10 9 8 7 6 5 4 3 2 1

DisclaimerThe material in this publication is of the nature of general comment only, and does

not represent professional advice. It is not intended to provide specifi c guidance for

particular circumstances and it should not be relied on as the basis for any decision

to take action or not take action on any matter which it covers. Readers should

obtain professional advice where appropriate, before making any such decision. To the

maximum extent permitted by law, the author and publisher disclaim all responsibility

and liability to any person, arising directly or indirectly from any person taking or not

taking action based upon the information in this publication.

iii

Contents

About the author xi

Introduction xiii

Section I: getting on the mortgage merry-go-round

Isn’t buying property always better than renting?1 3

Can your own home be a gold mine?2 5

Property is way too expensive — how will I ever own 3

a home? 10

I heard the government will give me money to buy my 4

fi rst home — is this true? 16

But if home prices aren’t increasing, why buy now?5 18

Why save for a deposit when the banks will lend you 6

100 per cent of the purchase price? 19

What sort of deposit is ideal?7 23

But I’m paying mortgage insurance, so I’ll be fi ne if things 8

get a bit hairy, won’t I? 26

Are there any advantages to paying lenders mortgage 9

insurance? 29

I’m going to get my parents to go guarantor on my 10

mortgage — that’ll make it easier and avoid paying

lenders mortgage insurance, won’t it? 31

Aren’t there a heap of mortgage offers that can help 11

me get into the market without having to save so hard

for a deposit? 35

iv

Mortgage Stressbusters

How do the banks decide how much money they’ll 12

lend me? 38

Credit rating? Isn’t that whether you prefer a gold or 13

silver Visa card? 39

I’m self-employed, so I’ll always have to pay more for a 14

mortgage, won’t I? 42

Section II: loan sweet loan

What does the current so-called credit crunch mean for 15

getting mortgages? 49

Banks offer the safest and cheapest mortgages, so why 16

bother with a broker? 50

All mortgages are the same, so what’s the point in 17

shopping around? 55

The lower the interest rate, the better the deal?18 58

It’s fee-free, isn’t it? The bank promised.19 61

Isn’t a fi xed-rate loan a much better way to go?20 65

What! I’m not paying this thing off for 30 years?21 68

My mortgage is signed, sealed and delivered — all I have 22

to do is make monthly payments from now on, don’t I? 70

A broker has told me about a mortgage-reduction 23

scheme that sounds good — what should I do? 72

How come some people get better mortgage deals 24

than others? 75

Shouldn’t I look at houses before I work out my 25

mortgage? 79

How can I stressproof my mortgage?26 83

v

Contents

Section III: playing the property game

I love it, I’m buying it. I don’t need to look at any other 27

properties, do I? 91

This area is booming — I need to get in quick, don’t I? 28 94

Why should I care about rental yields if I’m buying the 29

property to live in rather than invest? 96

Isn’t buying near water, parks and swanky schools a 30

waste of money? I’m buying this cheap property on

the main road. 99

Should I care how old my neighbours are?31 101

This is the cutest little unit, why on earth won’t the 32

bank fi nance it? 103

What happens when I’ve made an offer and signed the 33

contract? 105

I want to buy in a suburb close to my parents, but the 34

valuation hasn’t come in at the right price. Why can’t I

use my own valuer? 107

Eek, I’ve already made an offer on the property — is it 35

too late to change my mind? 108

But my fi nance is approved, what can go wrong 36

from here? 110

Is it okay to buy without a building inspection?37 113

Aren’t you better to buy a wreck so you can add value?38 116

Section IV: property and mortgage tactics

Whether you need to buy or sell, isn’t it the real estate 39

agent that determines whether you get a good price? 121

vi

Mortgage Stressbusters

We’re going to an auction this weekend and we’re ready 40

to buy. What do we need to know? 125

But how can you be sure you aren’t paying too much 41

for a property? 127

Isn’t buying well about conditions and terms, not just 42

about price? 130

Are mortgagee-in-possession properties cheaper?43 131

Not all forced sales are mortgagee-in-possession 44

homes, are they? 133

Now we’ve bought, we need to sell our old house — 45

how do we know we will get the best possible price? 135

But I bought the house and now the bank is saying its 46

valuation is lower than the price I paid. How can that

happen? 137

But property prices don’t fall, so why should the banks 47

worry so much about valuations? 140

So how can you tell if a property could fall in price in 48

the future? 142

Surely you can buy the best bargains at an auction?49 144

Shouldn’t I buy the biggest house in the suburb at the 50

bargain price? 145

We’re in fi nancial strife and need to sell, now, now, 51

now — don’t we? 147

I am about to retire but still have a massive mortgage and 52

am worried about having to move — what should I do? 148

I can only borrow a certain amount — do I have to shop 53

within that price range? 149

vii

Contents

Section V: creative solutions to ease mortgage stress

I’m fi nding the monthly mortgage payments a real 54

battle — the credit card is out of control, too. What

should I do? 155

What are my options if I can’t pay my mortgage? 55 159

Things aren’t disastrous yet, but interest rates are 56

starting to bite — what else can I do? 161

My partner has just left me and I don’t know what’s 57

going to happen to the mortgage — he has to keep

paying, right? 164

I’ve found a mortgage broker who can save me by 58

refi nancing the mortgage and our debts — what should

I do? 165

We’re in strife with our lender — they’ve sent us a letter 59

after missing a payment. What should we do? 167

Repossession sounds scary. Is there anything I can do to 60

prevent it if I’m in arrears? 170

What happens under hardship provisions or if I go to 61

the ombudsman? 172

Isn’t consolidating debts and refi nancing the best way 62

out of my troubles? 176

But won’t refi nancing to a cheaper rate help?63 178

Is it better to refi nance or sell my house to downsize?64 182

What about moving out of the house and renting it?65 183

What about refi nancing to a shared-equity mortgage?66 187

Can’t I access my superannuation to pay off my debts?67 189

viii

Mortgage Stressbusters

Isn’t there some kind of government scheme to help 68

you if you’re having mortgage problems? 190

The house has been sold out from under me and I owe 69

the bank more money than they recouped from the

sale — what can I do? 191

This mortgage malarkey sounds like hard work — 70

why bother? 195

Glossary 197

Useful websites 207

Appendix A: do your own property market research 213

Appendix B: budget template 215

Appendix C: stamp duty rates 221

Appendix D: mortgage-needs checklist 223

Appendix E: mortgage fi nancing comparison checklist 227

Appendix F: property wishlist 231

Appendix G: house-moving checklist 235

Appendix H: benefi ts of buying at auction versus buying through private treaty 237

Appendix I: valuer versus agent prices 239

Index 241

ix

For my boys,MC65, Louis & Hugo

xi

About the author

Alex Brooks spends a lot of time at home writing about other

people’s houses, property and how we live. She has written two other

books under the name of Alex May — Planning Your Perfect Home Renovation and The Sydney Morning Herald Good Suburbs Guide — and

is currently working on a book about green home renovation. She

writes ‘The Green House’ column for House & Garden magazine,

blogs for The Sydney Morning Herald and contributes regularly to

G magazine, Sunday Life, Woman’s Day, The Sydney Morning Herald

and Sun-Herald. For more information, head to her websites <www.

alexbrooks.com.au> and <www.renovationplanning.com.au>.

xiii

Worrying about your mortgage is nothing new. But throw in

economic uncertainty, stagnating or falling property prices and

changing credit availability, and there is a giant stress ball potentially

waiting to explode in overstretched households across the country.

In fact, it’s been predicted that there could be more than one million

Australian households in mortgage stress by the time this book hits

the shelves in March 2009.

What exactly is mortgage stress? The offi cial edict is that mortgage

stress occurs when a household spends more than one-third of

net income on mortgage payments. Of course, the reality is not

as simple as that. A household with low income and a reasonable

mortgage could be better off than an affl uent household that is

highly leveraged with a big mortgage on the principal home, a

holiday home and even bigger margin calls against a portfolio of

rapidly falling stocks and shares.

Introduction

Mortgage Stressbusters

xiv

Mortgage stress is not simply feeling over-anxious about the size of

that debt on your bank statement each month. Scrimping on food,

family and fun can be part and parcel of having a mortgage — even

for people on great salaries — but real mortgage stress leaves people

vulnerable to the slightest jitter in the economy. It means there is no

margin for dastardly debt disturbances like infl ation, unemployment,

interest rate rises or house price falls. Mortgage stress preys upon

fi rst-homebuyers and over-leveraged near-retirees who may have

spent the equity in their homes by investing in residential property.

Has the great Australian dream of homeownership turned into a

big fat mortgage millstone? The boom in property prices over the

past decade was nothing short of astounding, with many homes

doubling and even tripling in price over a period of less than 10 years.

This huge gravy train led to the idea that any property is a great

investment. At the time of writing, however, the Australian Bureau

of Statistics has registered property price falls across Australia,

and further falls for Australian capital cities are predicted for 2009.

Those price falls have already occurred in many places — and not

just for struggle-street homes in the outer suburbs but also for

multimillion-dollar properties in affl uent areas.

Homeowners who had a stake in property prior to markets peaking

will probably be okay. But what of those people who bought for

the fi rst time, or who burned up their existing equity by investing in

property or paying off their credit card debt? Housing affordability

has declined rapidly since 2003 and the size of the average new

mortgage has expanded, with a large proportion of households

paying more than $3000 a month to feed the beast.

The word ‘mortgage’ has its origins in the old European languages,

with mort literally meaning dead and gage meaning a pledge — a

pledge to the death! That’s hardly an encouraging thought, but the

Introduction

xv

property and fi nancing secrets in Mortgage Stressbusters will provide

you with plenty of inspiration, helping you to save time, money and

heartache over debt secured by housing.

I hope this book is an easy-to-read tool that can help your household

tame its mortgage monster — or at least stop it keeping you awake

at night. It’s been written to appeal to all homeowners, regardless of

whether your mortgage is small, ginormous or totally out of control.

It unlocks some of the secrets of successfully owning a property

and securing a mortgage that will march you safely on the road to

security — which, after all, is probably why you bought a house in the

fi rst place.

As the old cliché goes: debt can be a wonderful servant but it’s not

so much fun as a master. So read the book, master your mortgage

and sleep well.

Section I

Getting on the mortgage

merry-go-round

Will your mortgage be a millstone or the making of a secure future

in a home of your own? Before getting on the merry-go-round of

monthly payments that seem to drag on for the term of your natural

life, read on to uncover some of the myths and economic truths

about homeownership (and the accompanying debt that goes with

it). Whether you are a fi rst-homebuyer, refi nancing or buying your

second or third property, this chapter outlines the ins and outs of

embarking on the mortgage journey.

While it’s true that homeownership and a mortgage can bring

plenty of benefi ts — including economic advantages — it’s also fair

2

Mortgage Stressbusters

to say that the costs of servicing the debt, maintaining the home and

paying all those bills such as rates and insurance can make a real dent

in your back pocket. For some people, renting might offer the most

secure fi nancial future; for others, the risks of large interest payments

and ongoing costs are worth it as they build equity and embrace the

‘forced savings’ that a mortgage imposes upon them.

If you do choose to go down the property-owning path, one word

you’ll need to become familiar with is the ‘B’ word — budgeting. The

government’s newly improved fi rst-homeowners grant — which at

the time of publishing was only available until 30 June 2009 — may

boost opportunities for buyers, but it’s important to note that the

general state of the Australian property market could be volatile in

the short to medium term. Plenty of property experts are predicting

small price falls in some areas, and modest price growth in others.

Are you prepared to take on a mortgage if the capital value of your

home could fall in the medium term?

Carefully planning your home purchase and mortgage, deposit

and repayment strategy has never been more important. The

fundamentals of successfully buying property remain unchanged,

however, as do the pitfalls of taking on a no-deposit mortgage,

risking too much with lenders mortgage insurance or failing to

stack up when it comes to your credit rating. Property is rarely a

risk-free investment but the benefi ts of owning the roof over your

head can easily outweigh the negatives. Only you can decide what’s

right for you when assessing the risks, repayments and rewards of

homeownership.

3

Getting on the mortgage merry-go-round

Question: Isn’t buying property always better

than renting?

Answer: Renting has advantages too.

1

Owning a home has a powerful grip on the Australian psyche. Plenty

of Europeans seem to prefer the convenience of renting in a desirable

location, rather than compromising on a property they can afford

to buy, but Australians are different. We are prepared to trade off

location or house size for the privilege of gaining that much-longed-

for security of homeownership. We ignore all those mortgage

interest payments and rarely consider mortgage interest to be ‘dead’

money. In many cases, we are prepared to pay a premium to banks

(or mortgage lenders) just to secure our dream of homeownership.

We seem to think of rental payments as ‘dead’ money, and we don’t

want to be forced to move house on a landlord’s whim.

But as our capital cities grow, and our dedication to inner-city and

beachside living increases, there is little doubt that the affordability

of buying — and, in some cases, renting — is under pressure. The

simple fact is that it is nearly always cheaper to rent a home in a

superior location than it is to buy.

The benefi ts of renting include:

being able to live in a better quality property in a superior /

location than could be afforded to buy

the freedom to move house easily and take up jobs wherever /

they come up

no maintenance or renovation headaches /

usually only needing to pay four weeks’ bond and weekly rent /

to secure tenure, while homeowners have hefty stamp duty

costs to bear upfront

4

Mortgage Stressbusters

if legitimately working from home, being able to claim the /

proportion of fl oorspace dedicated to a home offi ce as a rental

cost that can be deducted against income for tax purposes

having more cash free to invest in higher growth assets such as /

shares or your own business, which could perform better than

residential property.

The possible downsides for homeowners include:

interest payments on a mortgage are just as ‘dead’ as rental /

payments

infl ation, high interest rates and heavy debt levels leave /

homeowners vulnerable to a changing economy, particularly if

house prices fall and they are forced to sell

homeowners must take the time to sell a property before /

being able to move or access their equity.

Property delusion: there’s no point in buying a house if you have to take on a huge mortgage

Truth: Mortgages can seem ominously large, but it’s almost always a worthwhile move to buy your own home — one that can be paid off within your means, that is. Acquiring a large mortgage and paying it off over 20 or 30 years is the way most Australians save what they accumulate over a lifetime. A mortgage at two or three times the annual income of the household might seem horrifi c in the early days, but it will gradually build wealth and equity. Paying off your house quickly is also a safe investment for any spare cash — the interest earned on other investments is taxable, whereas paying money into your home mortgage increases your equity position without increasing your tax bill.

5

Getting on the mortgage merry-go-round

Question: Can your own home be a gold mine?

Answer: Yes it can, especially with carefully

planned property and mortgage strategies.

2

Property spruikers and media commentators will have you believe

that homeowners always make money out of their purchase and

that house prices continually increase, but this is not always true.

Homeowners can, and do, lose money in real terms. In boom times,

it could appear that someone who bought a house for $240 000

three years ago that is now worth $350 000 has made a massive

profi t — but it’s not always the bonus people think. Here’s why:

a real estate paper profi t of $90 000 is nothing to be sneezed /

at, but that same boom has forced up the prices of all property

in the market

upgrading to a bigger and better property — albeit with an /

extra $90 000 equity in the kitty — will cost proportionately

more than it did before the boom

even if property prices double, the only property owners /

that become truly wealthier are those willing to trade down

to a smaller or cheaper property (which is also likely to be

more expensive than it was before the boom) and cash out

their equity

property booms favour older, established homeowners against /

the young, who will fi nd it harder to step onto the property

ladder if prices are out of their reach

rising property prices can stimulate economic growth in the /

short term, but can quickly become a drain on an economy

as prices spiral upwards and money that could otherwise

be spent on other parts of the economy, such as retail or

manufacturing, is spent on mortgages

6

Mortgage Stressbusters

property markets always correct — either quickly or /

slowly — to the price most buyers are able to afford.

Making a ‘profi t’ on the home you live in is really a matter of how

you look at things. Homeownership brings plenty of benefi ts, not all

of which can be measured in black and white economic terms. For

many homeowners, buying property is worthwhile because:

there is greater security of tenure /

homeowners can change, renovate and add value to their /

property as they wish

by retirement age, homeowners will hopefully own their home /

mortgage-free and have no or minimal accommodation costs

fl exible mortgage products allow homeowners to access /

their equity to invest in other asset classes such as shares or

property if they wish.

Let’s meet the fi rst of two case studies we will refer to throughout

this book, and take a look at the ‘profi ts’ they have made from owning

property and at the other choices they could have made.

Case study A: Jane and Joe

Jane and Joe are a young couple in their late 20s who want to buy their fi rst home together. They are engaged, and plan on marrying in the next three years and eventually having children. Both currently work full time in the city, with Jane earning $80 000 a year ($4690 net a month) and Joe earning $100 000 ($5637 net a month).

Jane and Joe buy their fi rst home for $400 000 in a middle-ring suburb of a capital city. They pay around $18 000 in upfront

7

Getting on the mortgage merry-go-round

costs such as mortgage insurance, stamp duty, conveyancing and moving costs.

House: $400 000Fees (stamp duty etc.): $18 000Deposit: $40 000Loan: $360 000 at 9 per cent interest over 25 yearsCosts (rates, maintenance, insurance): $6000 per year

Five years later, Jane and Joe sell their house for $500 000. It appears they have made a $100 000 profi t — but have they really?

They could have invested their initial $58 000 upfront >

costs in a high-interest account paying 8 per cent per annum, earning them $4640 in their fi rst year.

Depending on the compounding and savings scheme, >

that $58 000 could have securely been turned into $85 000 at an 8 per cent interest rate on their savings over the fi ve years they lived in the house.

They paid $500 a month in rates and maintenance, and >

around $3058 per month in mortgage payments during that fi ve years — in effect, outlaying a total of $213 480 in order to live in their own home.

But what if Jane and Joe had rented that same house for $400 a week instead of buying it? What might their fi nancial position look like?

The couple would have paid only $104 000 during their >

fi ve-year tenure in rental payments, less than half the amount they outlaid as owners.

8

Mortgage Stressbusters

Case study A (cont’d): Jane and Joe

They could also have pocketed the interest on investing >

their initial $58 000 upfront costs (although they would have paid income tax on it), equalling $27 000 over fi ve years.

Even if rental hikes had forced Jane and Joe to pay >

$600 a week by the end of the fi ve-year period, the couple would only have paid a maximum of $156 000.

At the end of fi ve years’ renting: Jane and Joe paid up to $156 000 in rent but earned $27 000 in interest on their $58 000 savings — a total net worth of around $85 000.

At the end of fi ve years’ owning: Jane and Joe outlaid up to $213 480, living in a house worth $500 000 with around $348 000 owing on the home — a total net worth equity position of around $152 000.

By purchasing their own home, it appears that Jane and Joe have increased their net worth by $67 000 after fi ve years. Mind you, they have also outlaid at least an additional $55 000 over the fi ve years to pay their mortgage, so you can see how important mortgages are as a means of forced savings!

But what happens if property prices don’t go up at all over the fi ve-year period? With around $348 000 still owing on the home they purchased for $400 000, this gives them a total net worth equity position of around $52 000 — far less than the position they would be in if they had been renting. The numbers seem even worse if property prices fall by 5 per cent, and the house is only worth $380 000. If that happened, they would have a total net equity of just $32 000.

9

Getting on the mortgage merry-go-round

What these theoretical calculations show is that:

buying your own home is a valuable way of forcing you >

to ‘save’ and build equity

homeowners with large mortgages fi nd it harder to get >

ahead if property prices stagnate or fall.

To fi nd out whether buying or renting is the right fi nancial option for

you, ask yourself the following questions:

What are your living goals? How long will you be prepared to /

stay in a property or location? The longer you plan to stay put

(at least fi ve years is the minimum), the less risky it is to take

on a mortgage.

What can you afford? Is your income stable enough to take on /

a mortgage, and have you saved a deposit of 20 per cent of

the purchase price to help offset the risks of buying?

What stage in life have you reached? The younger you are, /

the less likely it is that you will want to be tied to a mortgage.

However, younger homeowners have more time to reap the

benefi ts of building equity.

What is the state of the property cycle? The property market /

can be volatile, though it’s always better to enter the market in

times of bust rather than paying over the odds to buy during

a boom. In times of rent rises, there is a fi nancial incentive for

people to buy their fi rst home. To help you gauge the property

cycle, do your own property market research (see appendix A).

Increasingly, people are taking a bet each way — renting in a desirable

location, while buying for investment purposes in a location that

might not be where they want to live.