Loan Management

Banks do indeed help. Banks can help re-structure lending whether you’re in hardship or not, however, it’s an important distinction as that gives the bank additional powers to offer solutions. 

1. Pro-active solutions. You can still re-structure your lending pro-actively without being in hardship. However, it would be based on meeting the current lending criteria. Lending rules change all the time, and as interest rates rise, so do the stress tests. Rule of thumb here, is if you can comfortably afford all your commitments but you’re just being pro-active it’s worth exploring this. One good example is say you’re a young family planning your next child – at this stage household income is comfortable but there may be a season where it’s not, especially if one parent wants to reduce income to spend more unpaid hours with the family.
2. Bank helping in times of need. Banks do have a hardship process to which they could help in a range of ways. One thing to keep in mind is that it’s not a permanent solution. That assistance helps to buy time and most of the time that’s all a borrower needs in that season of their lives. The expectation though is that you’ve taken practical steps to use all other means necessary to see through this period. This also includes creating a household budget that works if your household income has fallen, or utilizing your insurance (if available) etc.
3. Interest Only. For short term assistance, this is generally the preferred method. When the I/O period ceases, the principal & interest repayments return to the remaining term. The advantage of this is that it reduces the lifetime interest charged, however the disadvantage is that your payment would increase slightly as the balance has not decreased.
4. Extension of Loan Term. An alternative method is an extension of the loan term. The advantage is that repayments would drop and would stay low, however the disadvantage is the total lifetime interest would be higher. What we would suggest in this case is careful review, so when household income comes back on track to gradually keep shortening the term by increasing the payment one year at a time. With careful management this could be an effective solution.
    
5. Mortgage Holiday. As the name implies, you’re on a holiday! Short term immediate relief, however long term suffer more substantial financial consequences. In this scenario as you’re not paying the principal or interest, the loan balance continues to rise. It can be suitable for short periods, but needs careful management to minimize the cost of this. One good example of this being an effective tool, is in the event of a separation where it’s confusing to figure out what needs to be done, a short term mortgage holiday may be suitable to ensure enough cash-flow to get through the period. Since the exit strategy is to sell the house the long term cost is minimized. 

Bonus:

1. Do everything you can to avoid a re-structure of your loan. Although it seems contrary to making it easier to get through this season – if you have done everything you can to make it work, everything else is easier by comparison. All of a sudden lifestyle creep is held at bay. When things improve, that surplus can be set aside for something important to your family, whether it be a family holiday or additional payments on your mortgage/ contributions to your investments etc.
2. Tackle the Elephant one bite at a time. Having control of your household budget is like eating an elephant, but take it one step at a time;
   1. On the income side, what is within your control to change? If we focus on expenses, we eventually run out of things to cut out – so increasing the ‘pie’ or in this case, ‘utensils’ is the first place to start.
   2. Perhaps there are items around the house that are no longer needed? Little sales here and there would not only de-clutter the home but also bring in some cash.
   3. On the expenses side, what are your top 3 expense categories? Usually it’s rent, food (groceries, dining out etc.), Vehicle (payments + cost of up-keep). Making changes to these top categories will yield 80% of the results.
   4. After that, look at your regular subscriptions. Simple example is households subscribing to multiple entertainment services. Do you have Netflix, Neon, Disney & Prime all at once? Go through the content on one of those first, and have them on rotation! Easy savings. 
   5. Create and stick to a budget. Take a look over your last 90 days of expenditure.. Review what  and use the sorted.org budget calculator to set a budget to stick to. Review it once a month and see how you’re tracking.
   6. Big expense coming up? Whether it being a holiday or replacing an appliance whether as small as a toaster or as big as a car, set that money aside up front and create a priorities list of things that need to be replaced.