Mortgages for When Life Happens to Us…

A long-term view helps you to focus on your desired destination. You may have to slow down or adjust your plans during times of difficulties, but a long-term view will help you not to make permanent decisions on temporary circumstances or feelings.

Here are things to consider during hard times:

• A contingency plan

Have a pre-defined contingency plan that you can adjust and execute when hard times happen.

•  To act or not to act

Assess your situation and gather facts before you act irrationally so that you don’t fall prey to sensationalism, misinformation or stubbornness.

• Beware of short-term relief

Beware of decisions that will bring short term relief but will cost you a lot more, long term. E.g selling your house when you don’t need to, holding on to your home even though there is no end in sight to your problems, extending or maxing your credit to pay for expenses with debt, get a second mortgage without getting advice, declaring bankruptcy before exploring all other options, etc.

We recommend that you have 3 to 6 months’ expenses of liquid assets easily and readily available.

Your reserve fund has the following benefits:

• Protects you in times of uncertainty, job loss or income instability
• It gives you immense everyday peace of mind
• You have options available to you that you would not have without it. For example, you can look for a new job if your current position is no longer acceptable to you

Debt is the last thing you want to struggle with during hard times, so it is not a good idea to depend or rely on “skip-a-payment” mortgage options or credit, including a Home Equity Line of Credit, for emergency purposes.

If you think you cannot save a rainy day fund, remember; you either discipline yourself and save the funds on your own terms, or if you don’t, you will be forced to borrow the debt and then pay back the debt, with interest, on the lender’s terms. Paying back debt is much harder in many ways and a lot more expensive.

Have an achievable, realistic plan to be mortgage-free faster, but if you don’t have one, at least pay a little extra on your mortgage so that your mortgage balance is lower than your expected balance by at least a few payments. This is important, since some mortgage lenders may allow you to skip payments by using the extra funds that you paid.

Protect your credit as much as you can. It is easy to make poor credit decisions for temporary relief, but the financial consequences due to damaged or poor credit can be very limiting. These decisions can remain with you for many years and cause you to be subjected to poor lending products and elevated interest rates for a very long time.

One of the worst things you can do is to take a mortgage based on an interest rate only. The vast majority of people do and unintentionally tolerate poor mortgages, because they are unaware of the potential limiting life-cycle mortgage costs they may incur that could far exceed their perceived interest rate savings.

Here are a few planning items to consider that will stand you in good stead during hard times:

• Look for a plan

It should speak volumes to you if your mortgage provider has not thought through options for you and/or does not have mortgage plans for you beyond an interest rate and a lender.

• Consider your mortgage’s exit costs

To satisfy our fear of getting a mortgage, we normally only focus on getting a mortgage and pay very limited attention to the life-cycle costs of our mortgages. We should consider costs and consequences associated with leaving our existing mortgage and lender; it may cause us to think twice about certain products or lenders.

• Protect your cash flow

If you are concerned about the sustainability of your mortgage payments, you may want to start with an extended amortization. This will make your minimum mandatory payments lower and more affordable when you need them to be. You can always voluntarily increase your mortgage payments so that you pay your mortgage down faster, but then decrease them during times of decreased income or hardship.

• Down payment

While it is normally a good idea to have a large as possible down payment; it may not always be, especially if it means you have to sacrifice your rainy-day fund to achieve your down payment goal. Make sure you have sufficient funds to protect yourself in hard times.

• Home Equity Lines of Credit (HELOCs)

Do you need one? Are they good for you and what are the consequences of having one? HELOCs are often used as an emergency fund source, but because of their higher interest rates and the home owner’s easy access to money, HELOCs are a significant profit source for mortgage lenders and a major reason why borrowers never become mortgage free, get higher interest rates at renewal, have less mortgage choices, to name a few. So, unless you have a very good reason why you need a HELOC (it is not a good emergency fund source), you may want to think twice about getting one.

It is important that you know your mortgage’s terms and conditions and your lender. What privileges are included in the mortgage and what are their consequences?

E.g. “Skip/miss-a-payment” privileges; are they good for you? Are they automatically granted to you by your mortgage lender?

Contrary to popular belief, this feature is usually not automatic and has significant terms and conditions attached to it. If granted, it is an expensive “privilege” for the borrower, since the bank will add the full missed/skipped mortgage payment to the mortgage’s balance. This means the borrower will pay interest on interest, which makes it a very profitable feature for mortgage lenders.

We previously discussed cash flow, but in this section, we will discuss cash flow as related to income producing or investment properties.

• The purpose of an investment property

Remember, your investment property is essentially a business and businesses are supposed to be profitable. Profitability means that your income (rent) must exceed your expenses. If your rent is fixed (which it normally is, since you cannot increase your rent at will), it is essential that you reduce your expenses (mortgage payment, etc) as much as possible.

• Profitability = sustainability

If your investment property is profitable your property is sustainable, and you are largely protected against financial hardship. Do whatever you can in good times to make sure your investment properties are profitable so that you are not forced into less-than-best short-term decisions in hard times.

• The alternative to profitability

Consider the scary alternative; your investment is not profitable. Someone convinced you that the property’s appreciation trumps positive cash flow for example, the market softens (thus the investment property’s equity is diminished or completely removed so you cannot or don’t want to sell it) and you cannot afford to subsidise your investment property any longer. The consequences can be catastrophic.

Be mortgage-free faster than normal. Do this in a responsible way so that you don’t sacrifice other parts of your financial future in the process. Being mortgage-free faster means, you pay less interest and you increase the equity in your home. The more equity in your home (the lower your mortgage), the more mortgage options will be available to you in hard times if you need them.