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Mortgage is a burden and a risk. Financial due diligence is planning to avoid costs for re-financing or a mortgagee-sale. Tips to combine fixed and floating interest rates for managing loan payments in good and bad times.



Financial Due Diligence

Flexible loan structure to avoid a Mortgagee-sale

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The evil part is consumer debts provoke expenses you otherwise would not have. If you show off with a luxury car you cannot afford, not only the loan repayments are a pain but also you lose substantial resell value and pay for extra costs while having that luxury.


Check it out - how much of your monthly payments are credit card, hire-purchase re-payments and related interests.  People lose hundreds of dollars to finance services who rubbing their hands together with glee.



Not all debts are evil and why


Consumer debts are draining your pockets and considered as bad debts. So, in contrast what are good debts? Good debts are loans you would sign up for income producing investments. The concept is that an investment will grow in value or generate active or passive income. Such loans are commonly used for education (e.g. student loan), building a business or purchasing income producing assets (e.g. stocks, investment properties). For more details visit the blog post library.


As exception a mortgage to buy a home is as considered as good debt . Even by not producing income a owner-occupied home is usually used as shelter for loss due to inflation (capital growth and shrinking loan value through inflation). A mortgage is a huge burden of paying interests, but for many homeowners a retirement plan.



Mortgage is a burden and a risk for homeowners


Owning the liability to care for a home that is held as security by a bank is a privilege and a risk. You pay for everything like rates, repairs, insuranceÖ but in fact you donít own your property. The longer you carry debts, the more you pay for the privilegeócheck the illustration with numbers. And as long as your mortgage is more than 50% of the market value of your home you have reduced your net wealth and this debt is a risk.


How the bank calculates the risks, you know that from your mortgage application. But it doesnít end here because your loan serviceability and interest rates change over time.

The large numbers of mortgagee sales between 2010 and 2012 tell stories. Not everybody could avoid that the loan agreement turned sour because of changed† circumstances such as job loss, accident, relationship break up and increased interest rates. Homeowners have to make savvy financial decisions and† home buyers have to put the financial due diligence first on the list including

 Choosing the right loan structure (% of fixed and floating)

 Keeping home loans adaptable (split loans)

 Considering LVR and income protection



A flexible loan structure is priority


Let me explain; when fixing the mortgage interests, it is quite difficult to choose the best time frame as nobody can tell whether the rates go up or down and what the future will bring.†


By splitting the loan in two third fixed and keeping the remaining part on floating interest rates, you would be able to make flexible re-payments in good times but also stretch your mortgage payments in bad times.


Talk to a financial advisor or broker regarding your loan structure and income protection.

Note, the answers arenít the same for everyone because lending rules differ for† homeowners and investors.



Tips for your financial due diligence


Prevent over-committing yourself

Look at your income. Your can only spend what you have earned and saved. With your disposable income (income minus all your outgoings) you will repay your mortgage. If you own bad debts and have not saved a sufficient deposit, possibly you are not ready yet.


Fix only two third of your loan and keep one third floating

Splitting a mortgage gives you control to reduce mortgage costs.† Think about circumstances such as a pay-raise or windfall; you could repay the mortgage† quicker and save a huge amount of interest payments.


Plan with average interest rates but compare bank rates to find a lower offer

For instance you borrow 300k. Currently you would pay around 5% interests in total for the first year 15,000 Dollars. I would plan with an average interest rate of 7.5% - in total 22,500 Dollars and would use the difference of 7,500 Dollars (22,500ó15,000) to pay down the floating part of the home loan.


Use a broker

It pays to use an independent broker because in this way you can compare different banks, different products and rates. Always look for a broker who is a member of the NZMBA and who is also qualified and registered to give you financial advice.


To get a feeling what you could borrow and on what terms talk to your home bank. Use an on-line loan calculator to analyze your situation. But then get a broker involved. This is really important for high loan to value mortgages (80%+) as some banks charge huge fees whilst other banks might have special offers, insurance etc. A broker knows that.


Remember, everything the bank does is to protect the lender in the event of default.† The real value of a broker is his knowledge to avoid mistakes and he will make sure the application is put together properly, because he only gets paid if the mortgage is drawn down!



Avoiding a mortgagee-sale


Financial hard times come often out of the blue. In any circumstances the only way to avoid a mortgagee-sale is to speak as early as possible to the lender. For instance increasing the duration of the loan would increase the total costs but reduce the ongoing mortgage payments (see example).


Taking principal payments on hold is another option to keep your home ownership alive. The priority here is reducing monthly payments and resolving the cause of the problem. Donít give up, your bank will take your cooperation in consideration.

Good luck


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Are consumer debts evil?


People who are grown up with debts are more likely to carry on buying things even if they donít have sufficient income to pay for them. Sooner or later the problem with debts hits hard as they have to be paid back. And that is more than you might expect.


Why? You have accepted interest payments on debts, right?† Well, have you considered that your re-payments are made by income after tax?


Example: you owe the bank 10,000 on your credit card by 19% interests. So your re-payment would be 11,900 Dollars (10,000 plus interests). But that is not all you pay because your received income is money after tax. In the tax bracket of 33% you have to earn little bit more than† 18,000 Dollars for paying 11,900 Dollars to the bank.† Is that good? No, that is a lot of money and labour for repaying 10,000 debts.



Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, residential properties and healthy lifestyles.†


The passion of making experiences available comes from renting in different countries and working with people who are interested in home ownership. Helping people to avoid pitfalls has been most rewarding, when forming relationships.


Our philosophy to treat life, partnerships and hobbies as an investment has helped people in our circle. Life is a dream with a deadline, happiness comes from making the right choices by having realistic expectations.


Come along and participate ó boost your confidence!

Are consumer debts evil?