It can and does happen that, due to an unforeseen situation, you may be unable to meet your home loan repayment obligation. Most often, this occurs when a tragedy is involved, such as a family member falling ill and medical costs escalating, a divorce, or the main breadwinner losing their job. Even a vet bill can be a heavy expense when you are living from payday to payday.
Importance of savings
The first and most important failsafe is to ensure you have some savings. Traditionally, financial advisors stress the importance of having a savings or emergency fund, which at a minimum should be able to cover at least three months of your monthly expenses. After the pandemic, many analysts revised this to six months of savings, but this all depends on your financial comfort zones.
Even if you are living from month to month, it is important to tailor your living expenses to your income and then look at where you may be able to realize some savings. This could come, for example, from paying off your credit card balance in full every month to avoid paying interest on the credit you are borrowing. It might be that you can realize some savings by cutting out luxuries or looking for bargains. The important thing is to create a separate savings account that you can access immediately, and only for emergencies.
To help you reduce expenses and boost your savings, consider the following strategies:
Cancel unnecessary subscriptions: Review your recurring expenses and eliminate any subscriptions or memberships you no longer use or need. This can include streaming services, magazines, or gym memberships.
Reduce utility costs: Implement energy-saving measures such as using energy-efficient appliances, sealing drafts, and turning off lights when not in use. These small changes can lead to significant savings on your electricity and heating bills.
Limit dining out: Prepare meals at home instead of eating out. Cooking at home is generally more cost-effective and healthier. Plan your meals in advance to avoid the temptation of ordering takeout. Learn to start using whatever ingredients you have to rustle up a meal, where possible.
Shop smart for groceries: Create a shopping list before going to the store and stick to it to avoid impulse purchases. Look for sales, buy in bulk when appropriate, and consider generic brands to save money.
Negotiate bills and services: Contact service providers for your internet, cable, or insurance to negotiate lower rates or seek available discounts. Companies often have promotions or can adjust plans to better fit your budget.
Implementing these strategies can help you cut down on unnecessary expenses and allocate more funds towards your savings goals.
What happens when you skip a home loan payment?
If you think you can get away with just skipping a payment, think again. Usually, the home loan provider will contact you the moment your account is red-flagged as not being paid or the debit deduction cannot be processed. If you haven’t already spoken to your home loan provider, now is the time to do this. If you wait too long, you stand the chance of being blacklisted and your credit score being affected, which can have long-term impacts on your ability to borrow money in the future.
Missing a home loan payment can lead to significant consequences:
Immediate communication from your bank: Your lender will promptly contact you regarding the missed payment.
Negative impact on credit score: A missed payment is recorded on your credit report, potentially lowering your credit score and affecting future credit applications.
Accumulation of additional costs: Late fees and interest charges accrue on the overdue amount, increasing your overall debt.
Risk of legal action: Continued non-payment may lead to legal proceedings, potentially resulting in the repossession of your property.
First step: Wise step
The moment you realize that you are facing financial distress, even potentially, it is crucial that you reach out to your home loan provider. You will find them sympathetic to your situation, and all major banks can provide you with guidance and options. There are other reasons to get ahead of the issue, such as helping to minimize potential penalties and damage to your credit score.
Home loan providers such as banks understand that the cost of living today is high, and that unforeseen situations occur. Yours will not be the first sad story they have heard, and as such, they have developed solutions to help you navigate financial difficulties. These include:
- You may be able to skip one or more of your home loan repayments by increasing your payment amount in the months when you can afford to pay more. This is also known as a ‘payment holiday.’
- You may be able to arrange to only pay the interest portion of your installment until your financial circumstances improve, but it will mean your home loan will take longer to be paid off.
- You may be a candidate for extending your home loan term, so instead of 20 years, it can be increased by as much as up to 30 years. This will reduce the amount you pay on your home loan monthly, but again, it will take you longer to pay off your home loan and you’ll be paying more interest over the long term. However, you may be able to recover by paying more on your home loan when you can afford to do so.
- Access your home loan: meaning that if you have paid off a percentage of the home loan, either by having paid more into your bond each month or the home loan has been regularly paid over some years, you may be able to access the portion of the house you have paid for, or use that to reduce your home loan installment amount.
The questions the home loan provider may ask include:
- Why you missed your home loan repayment.
- Whether you have tried to fix the problem, and how long you anticipate it to last.
- Do you have documents that prove why you are in this situation?
- If you have already taken corrective measures, what are those, and how you can further cut costs.
- What your other financial burdens are.
- Whether you want to keep your home, or sell it?
- What type of payment plan will suit you best.
Other guidance and considerations
There are also other options that you may consider, especially if you anticipate that your financial situation may have long-term effects. This includes:
- Is your property rentable? If you can find alternative accommodation like staying with family, you may be able to rent out your property, which will cover the home loan repayment and possibly give you a little more financial gain.
- Should you sell your property? This is far better than having your home repossessed by the home loan provider, who may sell it at a price that merely covers what you owe on the property—although they do their best to sell at the highest price. If you advise your bank that you are putting the house on the market, the bank may discuss your being able to settle any outstanding payments after the sale. The bank may also be able to assist you in selling the home.
- Should you borrow money? This is not a good idea as it can sink you further into debt, unless, of course, you are aware of a payment that is coming in, such as a divorce settlement, a dividend paying out, your house is sold and you are waiting for transfer, etc. Borrowing from family may be an option if you can negotiate around not paying interest.
- Are you able to sell valuables? As much as you may not want to, sometimes ‘needs must,’ meaning that selling a family heirloom or jewelry may be enough to tide you over for a month or two, buying you much-needed time.
It cannot be emphasized enough that the moment you anticipate or know of a change in your financial circumstances that may impact your ability to meet your home loan obligations, contact your home loan provider immediately.