Are you a Mortgage Prisoner?
What do we mean by Mortgage Prisoner? Becoming Mortgage Prisoner is something no one ever whats to be in a position of. Unfortunately it is the case for many Australians who purchased their properties in a time of boom and have become locked into their loan due to the falling house prices.
This happens when the loan on the property exceeds 80% or more of the property value locking the borrower into their home loan and making it close to impossible of refinancing to a facility or other lender with better rates.
How do I prevent this?
By getting professional advice you can protect yourself from costly mistakes. During the mining boom, thousands of Australians bought up big in many of the industry fed towns pushing house prices well beyond their “True Value”.
True value is considered to be a value to which a person is willing to pay. However the market in many of these small town almost became somewhat of a speculators market with people flooding into the towns and buying up multiple properties.
What do we look at when purchasing property and what lessons can be learnt from the mining boom and its effect on regional property market that could also be used in more metropolitan centers.
Yea, yea. You’ve heard it all before. Location, Location, Location. But do we really look into this in more depth? Most of the time the areas that we can see becoming popular have already seen the boom.
So what do we look for when buying in an area that has the potential for gains?
- Commercial Potential – is the area you are looking into close to a commercial precinct. Is there the potential for cafes and shops to spring up. Most areas that see growth are within walking distance of areas that make it easy to have a coffee and get groceries.
- Distance from a metropolitan area – How far away is the major metropolitan center, is it going to take more than 30 minutes to get to a major shopping area?
- Transport – Public transport is a big part of making a sound investment but can also depend on what you are looking to do. If you are looking for an investment and require a renter, public transport may need to be within a short proximity from the property but if you are looking for a property for owner occupied purchasers, having public transport too close could effect the resale price
- Topographical location – Where is the property situated? Is it on top of the hill or in a gully. As humans we are drawn to natural light and this will effect how the property sells or is seen by potential renters so buying further up a hill will usually mean that the property receives a greater amount of natural light. In saying this, you will find that the cost of obtaining a property further up the hill will cost you more.
- Industry – This can be one of the most important things to consider. What industries are evident in the area in which you are looking to invest. The issue with many of these regional towns was that there was only one industry. Literally buying in a one industry town is having all your eggs in one basket. So think about that when you are buying, What industries are here and are they sustainable.
Management of Debt:
Its all good and well being approved for a big loan but can you afford it in an extreme situation. How will you cover costs should your income decrease. Understanding the difference between what is available and what is affordable is key to ensuring that you can handle a loan of a particular size.
So what are a few way to manage your debt in times of need?
- Liquidity – you have heard of it but what does it mean? Being Liquid or having liquidity means that funds can flow free, in other words being able to access funds or equity within a short period of time. Should you need to shift funds to cover an unexpected expense, you have the ability to do so.
- Paying above contract- Most loans will have the option of redraw or an offset account, by paying more than the contract amount off of the loan you will have the ability to access these funds should the need arise.
- Offset Account – An offset account is possibly one of the most underrated tools for sustainable debt management and is an extremely flexible facility. They work just like an everyday account but with a difference; all funds that are held in this account offset the funds owing on the loan, meaning that it is just as if you had paid those funds off of the loan itself. This reduces the interest paid on the loan while allowing all of these funds to be accessed at anytime just like your regular bank account.
- Repayments – Did you know that by paying fortnightly you can pay a considerable amount more off of the loan than by paying the same amount monthly. e.g 12 monthly payments of $1000 = $12,000 however if you pay $500 per fortnight you pay $13,000 off of the loan.
Renovation & Improvements:
Improving the property can be fantastic to increase the value but where do we put the money to get the biggest bang for our buck. Renovating your property can be like walking a tight rope, if you put money where it doesn’t work for the resale it can have a negative effect on your financial position.
So how do with renovate without over capitalising especially if you are borrowing to make the improvements?
- Kitchen- The kitchen has become the hub of the home. spending money in this room can go a long way and be the clincher of a potential purchaser when its time to sell.
- Bathroom- I’m sorry but your 1960’s green bath tub will not do. But you don’t need to spend big to modernise. There are companies that can come in and use a specialised paint to remove this no longer popular colors to one which is a bit more on trend.
- Flooring- Carpets have a general 10 year life span, if your carpet is older than this it needs to be on your list of things to change. Got tiles? There are a huge amount of affordable alternatives that can modernise and liven up your living space such as laminates.
- Paint – This is an obvious one, by painting the either inside or out, you are going to give the impression of a well care for modernised house that anyone will be wanting to make an offer on.
There are many other ways to not become a mortgage prisoner, for more information or to have an obligation free consultation with our experts contact North Capital Finance.