Mortgage Restructuring

If you're in a situation where your mortgage payments are no longer affordable, but you could still afford to make lower repayments, you may be able to restructure your mortgage to make the monthly payments lower.

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Trouble with Your Mortgage? Here’s How to Make it More Affordable

In the last decade, scenarios in which home-owners suddenly find themselves unable to afford their mortgages are have become increasingly common. Whether it’s due to loss of employment, rising interest rates on a fixed-rate mortgage, out-of-control debt or other unpredictable factors, there are thousands of Australians in financial crises due to mortgages they can no longer afford. If you’re in this situation, what can you do to make your mortgage affordable?

Restructuring for Lower Monthly Payments

If you’re in a situation where your mortgage payments are no longer affordable, but you could still afford to make lower repayments, you may be able to restructure your mortgage to make the monthly payments lower. For example, if your family’s income has decreased due to one partner losing their job or taking a pay cut, restructuring the mortgage to reduce payments might ease the additional financial burden. Another situation in which this strategy is useful is when your mortgage has an adjustable interest rate, and you want to refinance it to take advantage of a lower interest rate than the one you currently have. In other cases, people who get mortgages when they have poor credit often opt to refinance when their credit improves, since a good credit score can qualify you for a lower interest rate.Regardless of your reasons for restructuring in this way, it’s important to work with your lender to make sure the new mortgage terms are going to work for you. And just like you did when you initially got the mortgage, you need to take a good look at exactly what you can afford to pay—and be realistic about your income and expenses. There’s little point in trying to fool yourself or your lender about what you can afford, because it’s only setting you up for more problems if you end up restructuring your mortgage, only to find that you can’t pay this one either.

Depending on your circumstances, and the terms of your current mortgage, there are typically two or three potential strategies for restructuring to reduce your monthly payments.

Increasing the term of the mortgage—e.g. from 20 years to 30 years—without refinancing. This reduces monthly repayments without incurring the costs of an actual refinance. If your problem is that you can’t afford your current mortgage payments this is the best option, since it means you have no up-front costs. In the long run it does mean your mortgage is costing more, however, since you’re paying more interest by increasing the loan term.

Refinancing an adjustable-rate mortgage to a fixed-rate mortgage basically means getting an entirely new mortgage, which you qualify for all over again. This means you’re paying an additional round of fees, just like you did for the first mortgage—so it’s important to calculate your costs and savings, and make sure that refinancing will save you money after those extra costs are accounted for.

The same principle applies when refinancing for any other reason; for example, if you’re refinancing because your credit score has improved substantially, or your financial situation has improved to allow you to afford to make higher repayments. But again, if you’re refinancing for these reasons it’s crucial to make sure the new mortgage terms will be affordable and that they’ll actually save you money in the long run.

Mortgage Relief—Getting Help and Saving Your Home

For some people, the problem isn’t so much that the mortgage payments are unaffordable in the long term, it’s that they’ve gone through a period of financial problems that have led to one or more missed payments. This isn’t an uncommon problem at all; one survey showed that one in ten Australian home-owners have missed at least one mortgage payment. The key to preventing this from becoming a serious issue, and risking losing your home altogether, is to contact your mortgage lender as soon as you know you’re going to have a problem—by getting on top of it sooner, you have more options for getting help. If your problems are short-term, you can ask your lender for what’s called a hardship variation, in which your repayments are temporarily restructured to prevent you from defaulting on the payments.

As well as this, you can look into state and federal assistance programs; most states have schemes that provide relief loans for people with mortgage trouble. In Australian Capitol Territory, for example, a $10,000 relief loan is available for people who are behind in their mortgage payments, but have the ability to keep up with payments in the long term. In Victoria, an interest-free loan of up to $7,000 is available, and in Queensland, a similar scheme can provide an interest-free loan of up to $20,000.

No matter how you choose to solve your mortgage problems, always keep in mind that avoidance isn’t a solution—it only makes matters worse, and may ultimately mean that once you do try and get some help, it’s too late to fix things.

This is a freelance article from Gemma Hopper.

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The review "Mortgage Restructuring" was last updated on 17/04/2015.