Dealing with mortgage stress

Property

Taking on very large debt is the only way most people can buy a house these days. Here is how you can live with the load

21st Apr 16, 9:12am by David Chaston

Owning your own home is a great achievement. Not everyone can do it, but if you can, there are many great rewards.

But unlike renting, home ownership comes with some definite work, stuff you can't really put off or escape from.

The rewards and advantages last and are substantial.

And so does the work. But at least with some good advice, you can prevent it becoming oppressive worry.

Some people like to say taking on a mortgage is the largest financial commitment you will ever make. But these days, that is not true. (Saving for a comfortable retirement is a bigger project, but property ownership can be part of that project too.)

Home loans these days are large. Without proper structuring that size can be stressful.

But it doesn't have to be at extreme levels - which is where 'good advice' comes in.

Unless you are one of the rare types that don't need a mortgage, buying a house can't be done without a large loan.

Worry management

It will be stressful, especially at the beginning. But to manage that you need a plan - and you need to stick to it.

The core of any plan is your household budget, something you will be forced to face when you apply for a loan.

Fudging your application with 'enhanced income' and 'unrealistic expenses' is never a good idea. Ever.

But tight budgets focus the mind.

Three key things to understand

And there are a number of powerful ways you can get on top of the loan payments.

Firstly, you should look past the 'loan payment' amount.

Remember, you can get your payments down by extending out your loan. But over the length of your loan you will pay far, far more in interest. This is why you should target paying your loan off faster to get the best overall benefits.

Secondly, you should be prepared for bumps in the road. Illness and job loss could be something that might force you to lose your home. Fortunately you can insure for these risks.

And thirdly, remember a table mortgage pays down the loan principal very slowly at first, and very fast at the end. You will be energised to stick with your budget if you can get your head around how a table mortgage works. It’s not hard, but it is also not intuitive.

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Change the way you live

Once you have a home with a loan, keep your budget plan ‘live’. Make staying on top of it a key part of how you live. You won’t need to be completely focused for the whole life of your loan, but you should until at least a third of it is paid down – and that is much longer than a third of the time you committed to repay the loan.

This is the first in a series, so we will explore some ideas and concepts in future articles.

But let’s end this one with some math behind a well-known budget trick:

A daily cup of $4 coffee can be used to pay down your mortgage faster and the impact of this small restraint can be more powerful that you might realise.

If you have that coffee only once a week rather than once a day, you could save over $22,800 over a 30 year loan. That is serious money, well worth the sacrifice I say. You will have ‘little ideas’ that can be equally powerful – if you can stay disciplined. And almost all the savings will be future interest.

Use the skills of a savvy adviser

But you can’t know all the tricks. This is where good advice pays for itself.

Mortgages are long term commitments. A savvy mortgage adviser can help with so much more than getting you that competitive initial interest rate. Make sure you get access to all that assistance and expertise.

This article was written for the Global Finance (GFS) website and newsletter and is here with permission.

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42 Comments

by Uninterested | 21st Apr 16, 10:44am 1461192288

On table mortgages, I remember getting a printout from my bank on the outstanding capital on a regular basis. Initially I was paying off cents every 2 weeks. Towards the end it was paying off cents in interest every 2 weeks. It was hugely motivating to keep track of this.
Note: I was paying it off every 2 weeks, not once a month. Back then I got paid every 2 weeks. The effect of paying it every 2 weeks paid it off way earlier than the original assumption of monthly payments.

by dictator | 21st Apr 16, 1:50pm 1461203452

I also recommend fortnightly payments. If you run them through a loan app you'll find you pay less total interest.

A discussion on another forum we've been talking about lifestyle inflation and ridiculous consumer spending. Some people are spending 50% of the net income on consumer spending. It's worth taking a real look at where your money is going.

Often people are spending way too much at the supermarket. They dynamically price these days and prices can surge up. If you look at the price before taking something off the shelf you can save a lot. Certain items I don't buy above a certain price and after a while I've noticed price decreases on items. If you stop purchasing the supermarkets do adjust their prices.

Restaurant and bar spending. You can have one heck of an awesome lifestyle dining out and drinking a lot at bars, clubs, live venues, etc. I find it tough to not drink like a NZer but if you can cut back on drinks and dining out too much you can slash spending (unless you are so frugal you don't do anything).

Holidays. Damn I really don't take many holidays but I see friends going on massive trips overseas. You can cut the cost of those trips if you do your research, but some are spending all their spare money on travel. I suspect some people will have a difficult retirement.

Not everyone has big expenses so cutting little expenses makes a large difference, but some people are trying to dispose of every cent as soon as they can. Maybe articles could talk about saving for purchases instead of accumulating consumer debt as well. Consumer debt has destroyed the concept of saving and are charging mercenary rates for non-essential purchases.

I am also used to discussion of people deciding to cut expenses to become financially independent earlier, or smashing debts rather than making minimum payments on everything. These ideas seem to have disappeared from New Zealand thinking and mass media.

by H.Freman | 21st Apr 16, 12:59pm 1461200398

Planning ahead is most important. Use a calculator like www.loancalc.co.nz to see. Many don't realise it, but dropping to a single income can be putting you well into interest-only territory. Living expenses are only half of the picture.

by head_down_bum_up | 21st Apr 16, 1:35pm 1461202541

Agreed, you need to plan for different scenarios. Someone losing their job, someone getting sick, the car dying etc. It's no good planning on the lowest rate you can on your current earnings and expecting that to be the trend for the lifetime of the mortgage.

by KH | 21st Apr 16, 1:11pm 1461201064

With people paying so much interest on the mortgage, or indirectly via the rent, they have little left for other expenditure. Beyond the misery of that cash poverty there is another factor. There is little wonder that businesses struggle, given the lack of optional expenditure that people have.
The huge house prices are destroying business and employment.

by dictator | 21st Apr 16, 1:50pm 1461203420

You'll find the 5% or so that carry significant credit card balances have their spending power destroyed as well. Credit card rates are usually 5 to 6 times the interest rate as the best mortgage rates. $10k to $20k of carried credit card balance has interest as bad as borrowing $50k to $100k on a mortgage.

Interest bearing debt is eroding a huge amount of future spending power and potential savings. Of course you are right the majority of it going into the house price bubble.

by muntijaqi | 21st Apr 16, 3:57pm 1461211063

Well, that's a sacrifice we all have to make so that a few on the top of the pyramid scheme can live out of interests (out of other people's work)

Isn't that capitalism after all?

by Justice | 21st Apr 16, 5:04pm 1461215078

Yeap KH, you nailed it with those last two sentences. The trickle down effect of all this debt is actually an economy killer and this ALONE is why the government SHOULD act. Any delusions our economy is doing wonderfully off the great housing flick off is just not looking at the longterm disaster it is/will prove to be.

by Brendan | 21st Apr 16, 9:42pm 1461231767

True, on the flip side, new car sales highest on record, pool companies triple revenue, etc... Equity rich are fuelling growth, it's not all doom n gloom - albeit on paper gains

by Carlos67 | 21st Apr 16, 4:38pm 1461213536

A Mortgage is just a big psychological barrier for many people because its commitment for the long term. For me it was just math, pay a bit more each week over the top of the rent and buy the house. You pretty much just ignore what you owe and just start paying it off. House prices may have gone up in the last 5 years but the interest rates are now nearly half of what I was paying. You just need to mentally jump the hurdle and just get on with it, never worried about it that much you just get on with life like your still renting.

by Justice | 21st Apr 16, 5:16pm 1461215769

"Owning your own home is a great achievement. "

Is it really? What if this great achievement takes an entire WORKING life time to achieve because of the debt monkey on our backs? Is there not some greater meaning to ones life than paying a god damn mortgage/s?
I look at it completely differently David. I see it as a complete waste of human productive potential. I see this whole ridiculous DEBT based monetary system as the noose holding humanity back. I find it sad and at many times very depressing. The obsession with it just appalls me. Maybe I feel this way because I'm a designer by trade, an ideas person, a think outside the box guy who questions why we make and do the things we do all the time in every aspect of our lives. I'm not a mansion/bach/car and boat kind of guy. I like solving problems for people, it's my most pleasurable activity in life. Being in massive debt just does not fit my personality, and knowing all to well the entire system is a complete banking ponzi scheme full of corrupt practice and activity just reinforces those feelings.
Not my definition of wealth I'm afraid.

by Kakapo | 21st Apr 16, 5:22pm 1461216148

What?? You don't want to sell yourself into slavery? What are you, some kind of dangerous subversive?

by Justice | 21st Apr 16, 5:24pm 1461216298

;-) I love sarcasm too

by Plutocracy | 21st Apr 16, 5:49pm 1461217767

Careful Justice, you'll land yourself on the GCSB watch list as a potential 'terrorist' soon for comments and opinions like that!

by Justice | 21st Apr 16, 6:03pm 1461218628

In the world we now live in yes that is a possibility. The thing is, for a government to eliminate such descent would be very easy under our current 'watched' lives. For example, how hard would it be for a government to just put such citizens through the wringer? Out of nowhere comes an IRD audit, you bank account seized...etc etc..... So easy eh.

If i can think of it.....

by Kakapo | 21st Apr 16, 6:01pm 1461218468

Want to hold hands and skip?

by BadRobot | 21st Apr 16, 6:03pm 1461218600

Yes please

by Justice | 21st Apr 16, 6:06pm 1461218799

pass

by ObeseBallerina | 22nd Apr 16, 6:10am 1461262202

Nice rant. Where will you live when you retire?

by Justice | 22nd Apr 16, 7:41am 1461267718

by Justice | 22nd Apr 16, 7:38am 1461267517

My boat house most probably. That's our plan anyway. No real plans to retire really though..that's an old fashioned BB concept

by PeterPen | 22nd Apr 16, 8:02am 1461268930

If you are young enough, you can wait it out. The gut says, that our illusion of wealth based on printed money cannot last. The mind is simulating a thought experiment on how a collapse could play out. Take it as a given that central banks will invariably respond to everything and all by printing yet more money to protect the power and wealth of the privileged. How could this scheme eventually break down? With infinite printed money, theoretically no bank or state can ever go broke in a substantial way. Will social upheaval by those losing out be the end game?

Should have left mismanaged banks and countries to their well deserved fate during the last GFC. Would have made us a bit poorer and a lot wiser.

by Zachary Smith | 22nd Apr 16, 8:17am 1461269859

Nope, diversity means feudalism will prevail. The whole world may become third world. China and Japan may be able to hold out.

by Uninterested | 22nd Apr 16, 9:22am 1461273754

To save the govt the bother of "printing money" maybe they should just say: counterfeiting is legal!!!

by Keyser Söze | 21st Apr 16, 5:37pm 1461217067

Or just rent - and let your landlords subsidize your lifestyle.

by BadRobot | 21st Apr 16, 5:58pm 1461218320

And just smoke meth and generally ruin the house :-)

by keywest | 22nd Apr 16, 9:00am 1461272401

Hmmm...by buying my first house I was able to then continue investing and now have many houses and investments, nothing dared nothing gained I guess

by gordon | 22nd Apr 16, 9:44am 1461275092

when did you start buying KW? I started buying shares in 1986. My broker got me out before the crash and then I started buying again. I built up some capital and in 1996 started buying my main share at a $1. Those shares today including dividends,share buy backs, special dividends and imputation credits would be around $15. I would not be in the same position in ten years time if I was starting to buy those shares today as it would cost more than I could afford. Same for houses I would have thought.

by frazz | 22nd Apr 16, 3:07pm 1461294455

Nice to able to start investing straight after leaving University Gordon. I know some students living abroad that still paying off student loans plus interest, some having paid of 20K in interest alone.

by gordon | 22nd Apr 16, 3:33pm 1461295987

No OE Frazz, no car, no kids at that stage, living off one income. Did not travel until I was 42. Not so mch to spend money on then and travel was not so accessible then. It was easier to save in the 80's and 90's. We did not have the expectations Y has today.

by Aspiring home owner | 22nd Apr 16, 4:20pm 1461298843

Gee Gordon, I assume you are projecting your experience with your kids onto an entire generation. Spoilt brats have always existed and they always will. All the people I know my age live pretty frugally (I admittedly don't move in high circles). My in-laws (from the US) are appalled at our lack of disposable income and standard of living. Also, very few of the people I know who went on an OE earned and saved less than they would have done in NZ.

by gordon | 22nd Apr 16, 4:28pm 1461299322

My two kids both went to uni and are fully fledged professionals. The fact that I house them does not mean they are spoilt brats. Brats have no manners, boundaries or compassion. Those who know my kids like them a lot. Funny how people always relate money and spoiling kids together. Giving kids no boundaries is spoiling them.

by Aspiring home owner | 22nd Apr 16, 4:36pm 1461299790

Sorry if I offended - maybe a somewhat silly post on my behalf. I'm sure your kids are great. My point was more that a lot of young people are struggling to get ahead despite their best efforts. Certainly my experience is that the stereotype of the spendthrift young person is quite uncommon. Also, the "I walked to school both ways bare foot in snow etc." schtick does get tiresome...

by Zachary Smith | 22nd Apr 16, 4:52pm 1461300741

ZS,DGZ and ZS69, three different people, are brats.
I am a boomer. I drove my own car to school when I was 15. Went on my OE when I was twenty. I have always been treated as rather 'special' - true story.
(not skiting, just want to reveal another side of the BBs - a fairly typical non-schticky BB story)

by Aspiring home owner | 22nd Apr 16, 5:40pm 1461303638

Haha very good. If you don't mind me asking, why are you treated as 'special'?

by Zachary Smith | 22nd Apr 16, 6:00pm 1461304817

I was never told off and never had to do chores. I think boomers were brought up in a rare environment, a little like National Socialism but without the military responsibilities. It was a remarkably homogenous society that told their young people that they were very special, lived in a special country, a special society and that our lives would be much better than our parents that lived through the war and our grandparents that lived through the Great Depression plus two major wars. I have been told that young Chinese people are like this today too, because of the one child policy and their parents having lived through the Cultural Revolution.

by Justice | 22nd Apr 16, 5:42pm 1461303759

? are you talking about yourself in the third person?

by gordon | 22nd Apr 16, 4:58pm 1461301127

Apology accepted. If I am really honest I have to say my generation and X have really snookered Y. In my 30 years of practice I saw a lot of greed. One client in his late 50's had nearly 40 rentals. No kids, no dependents and he worked as a professional. I asked him how many he wanted and he said he was aiming for 50 and that it was now just a game. Interesting in that the gcc nearly ruined him and he was only saved by emergency interest rate reductions and the bank allowing him to sell down in an orderly fashion. They had a ton of equity, the income to service loans and cheap assets to buy. They went for it and now their children and grandchildren are struggling to buy a starter. Go figure. I for one did not look to rentals in order to achieve early retirement. Too many people I dealt with told me about their tenants behavior. Early retirement can be achieved through other and easier means.

by Aspiring home owner | 22nd Apr 16, 5:17pm 1461302242

Thanks Gordon. You have obviously had an interesting (and clearly successful) career.

I'm not convinced that one generation is better than the other either way, we are all just trying to get along as best we can with the situations we find ourselves in. Greed has been around since time immemorial... However, our current system does seem geared to an ever increasing slice of the pie being owned by a decreasing proportion of society and I do wonder where we are going to end up. I read Piketty around a year ago and you can't help but wonder whether we will inevitably progress towards a more feudal state. Then again, my outlook is probably coloured by my current predicament (which in all honesty isn't that bad - but isn't ideal). If I had got into property investment straight out of school then I'd probably be as chipper as Zach and DGZ!

by Justice | 22nd Apr 16, 5:49pm 1461304176

Gordon, I'm a GenX who left school in 1989 straight into a terrible recession. Please don't think we all participated in this greed "thing". Ive never gone out of my way to snooker anyones future. I have no rentals but I also have no debts which I'm grateful for.
I really don't want to be lumped in with BB's ever in any respect. They were A-holes to work for even back then.

by Kakapo | 22nd Apr 16, 6:44pm 1461307487

Me too, right down to the year. Story of our lives, isn't it? Boomers get the party, then we cop the hangover and clean-up.

Which is why Gen Y/Millenials have my full sympathy over all the bogus propaganda being directed at them about being entitled and demanding.

And I really object being lumped in with the boomers. That's nonsense. X got things far worse than Y, who've scored a few political bribes on the strength of being the kids of the boomers. Exhibit A: interest-free student loans.

by Justice | 22nd Apr 16, 6:39pm 1461307175

Yes, they have my full sympathy also. We really need a new political party that caters for these generations and we have the numbers to make it happen