From two incomes to one: how to cover your mortgage repayments
Wednesday 26 February 2020
Home loans can be expensive, but have you ever thought how you’d manage if you suddenly had to rely on one income, rather than two, to pay it down?
According to new research released this week by credit reporting agency, illion, over 60% of home loans in Australia are taken out by couples.
“Despite the widespread belief that first-home buyers in their 20s with small deposits are the most indebted group in the country, it is actually Generation X aged between 30-50, which is enduring ‘peak debt burden’,” illion CEO, Simon Bligh said.
“This is the age when owners typically ‘trade up’ from units to homes to accommodate growing families, and is also likely to be the time when household spending with dependents peaks.”
For many Aussies, this means that while having the source of two incomes has enabled them to enter the property market, as their family grows and property value increases, there is significant threat to their financial position if their partner or spouse becomes out of work.
So what should you do if the safety blanket of a second income disappears? Here are four things to consider before that happens:
1. Set up a rainy day fund and have a backup budget
Whether it’s the decision to start a family or your partner unexpectedly loses their job, you are going to need to have a budget ready to go to adjust to being on one income so you can continue to pay off your mortgage.
The first step is to set up a rainy day fund in case the unforeseeable happens. This could be in the form of a savings account or term deposit, or even an offset account attached to your mortgage. Whichever you choose, ensure you compare products to find the right option for you.
Then, create a backup budget. This may mean dipping into your rainy day fund straight off the bat if you suddenly find yourselves on only one income, but it is also crucial to set up a long term plan in case you need to rely on a single income over a long period of time.
Review your earning and spending, cut down where you can - whether that’s by doing smarter grocery shops or finding cheaper activities to do on the weekend - and ensure that you can realistically stick to the new plan. And if you need a little extra help, there are a bunch of budgeting apps that can help you every step of the way.
2. Check out your insurance options
If you or your partner find yourself without income for a period of time, due to serious illness or circumstances that were out of control, like involuntary redundancy, you may be protected under life insurance or mortgage protection insurance.
Depending on your policy, life insurance can include things like disability benefits, terminal illness or death cover and income protection. This means that in the case that you find yourself without income for any of the above reasons, your insurer could cover you up to a certain amount or for a specific amount of time. The benefit of life insurance is that it can cover other costs as well, not only your home loan repayments.
Alternatively, mortgage protection insurance is another form of insurance that covers your home loan repayments if you ever default on your loan due to losing a job, illness, injury or death. You can take out a single or a joint policy, but just bear in mind there are different levels of cover dependent on each person’s income. Also remember, this is different to lenders mortgage insurance (LMI) which is set to protect the lender not the borrower.
3. Review your current home loan
Mortgages are a massive cost in many Aussie households, so making sure you have a loan that you could potentially pay down on one income is important. This could be through a low interest rate, minimal fees or even features like an offset account where you reduce the amount of interest you pay on the loan.
According to recent research done by the Commonwealth Bank, one third of Aussies would only be able to cover their mortgage repayments for up to six months if they were to lose their partner or a dependent. Meanwhile, one in ten could only cover these costs for a month or less.
In response to these findings, CommBank launched a new home loan initiative, “Home Loan Compassionate Care” which covers the mortgage repayments of new and existing owner-occupier customers for 12 months in the event that they, their partner or a dependant is diagnosed with a terminal illness or passes away.
While this is an industry first, it could be an indicator of things to come - so it may be worth having a chat to your current lender and seeing what protections are in place in case the unexpected happens.
4. Don’t wait to refinance your mortgage
While you can’t plan for an unexpected loss of income due to illness or injury, if you are planning to start a family and one person will have to take off work for a while, don’t delay refinancing your loan until after your child arrives.
Mozo data shows that borrowers with a $400,000 mortgage could save $3,390 a year, by switching from the average big bank variable rate of 3.97% to the lowest rate in our database, 2.69%. That’s a total saving of $101,689 over the life of a 30-year-long loan.
Shopping around for a better deal on your mortgage could be a good idea, but this is difficult to do if you’ve dropped down from two incomes to one. So, make sure you plan ahead and refinance your home loan when you still have two sources of income, that way you’ll have already secured a lower rate before your combined income drops.
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Need to make the switch? Check out our refinance loan comparison table below or jump across to our home loan comparison tool for more options.