Managing repayment of a mortgage isn’t something to be taken lightly. It’s far more important than managing the payment on your flat or home rental, as if you fail to meet those obligations, in most cases you’ll just need to find a new place to live. A mortgage is different though. Failing to pay your mortgage will result in the loss of your home and destroy your credit. If that happens, you won’t be able to easily get into a rental, as many rentals check with the credit reporting agencies these days. That can leave you with little or no options in terms of a place to stay, and no ability to get another mortgage or consider home ownership for years.
To protect yourself against this and to make sure you’re able to manage your mortgage payments properly, there are a few things you’ll need to do. We’ve listed them below in order of importance. While some may appear to be common sense, it’s important to read the full list. This is because some of these items work off each other, and are part of the overall calculations you should make. These will help you be sure of repaying your mortgage, rather than finding yourself in a position where you’re losing your home due to an unexpected turn of events, an oversight concerning your repayment obligations, or a well-intentioned mistake in your financial planning.
Using a mortgage calculator such as this one to calculate your monthly payments is just part of what you should do to make sure you’ll be financially safe. There are also three other important considerations:
1) Budgeting: This is the single most important part of managing any mortgage. While most of us spend a number of years managing our own budgets, a mortgage is different. Not only do you need to manage the payments, making sure you have enough each month to afford your payment, but you’ll also need to have some money set aside for any unexpected things that may arise. For example, a broken pipe, clogged drain, or leaky roof will all be something you need to pay to repair. You won’t have a landlord or rental agency to fix them. While it may not seem like much, a leaky pipe that damages your floors or ceilings (or both) can cost significant money to fix. This is an unexpected cost that can destabilize your finances if you haven’t accounted for it with proper budgeting and financial planning.
2) Financial Changes: One of the reasons a mortgage is better than renting has to do with the fact that a mortgage payment remains relatively constant over the life of your loan. Your monthly pay will increase over the years, as will the value of your home (the equity). These things will build value, as you’ll have more money each year to satisfy the same payment with, while also being able to leverage credit on your home equity. However, sometimes things can change for the worse. You might find that the company you work with downsizes, or that you need to change jobs unexpectedly. This can result in less pay, straining your finances and risking your home. Being prepared for this is an important part of protecting yourself and your home.
One of the best ways to do this is by saving at least 10% of your mortgage payment every month in a separate interest bearing account. After three years, you’ll have enough to cover three and a half mortgage payments. In six years you’ll have enough to cover seven payments. Obviously saving more will put you even farther ahead of things, and better protect you and the security of your home. Just make sure you don’t make extra payments until you have some savings to protect yourself. Most of the time any extra payments will be made on the front of your mortgage, which is mostly interest. Even if you ask to have them applied to the principal of your loan, which will reduce the overall interest, you’ll still owe monthly payments. That means you won’t be protected in the event your financial circumstances change for the worst.
3) Unemployment Insurance: While PPI insurance schemes have gotten a bad rap, and one they rightly deserved, there are still times when it is a good idea to consider unemployment insurance. Good policies will pay out 50pc to 75pc of your monthly income for a period of one year. If you can find an affordable plan that meets your needs, then you’ll have the added protection of that payment in addition to any savings you may have. You just need to make sure that you meet all of the requirements, including age and length of employment. Many of these plans will not cover you if you’re over the age of 65, or haven’t been working with the same employer for six months or more. Other times the premiums for these forms of insurance may be so high that you’re better off to just save the money yourself, building your own form of insurance, as we discussed in Step Two.
Following these three steps is just a part of managing your mortgage obligation. There are other considerations, not the least of which will be your overall financial management. This includes keeping track of credit card purchases, term purchases such as a car loan, financial considerations involving your children, and even your own retirement planning. Collectively these can all be a drain on your finances, creating unexpected and unplanned financial complications. This is why it is important to maintain a firm grasp of your finances early on, making sure you’re always able to meet your mortgage obligation.