This is a question asked by many expectant mothers, so we have some great tips to help you through this challenging financial period. Part of the excitement and joy of planning a baby is buying gorgeous grow suits, cute cuddly toys, prams, cots and all the other stuff that you’ll need for your new family addition. A little bit less exciting, but just as important is planning how to manage your home loan repayments on a reduced family income while you’re on parental leave. Even if you are entitled to receive the government parental leave pay, it probably won’t replace your salary as it’s the national minimum wage amount for a maximum of 18 weeks.
It’s vital that you know what your options are before you go on leave, so you understand what strategies can work for you and put the right ones in place. Not all banks are the same, so if yours doesn’t have several options for you, it may be time to talk to your mortgage broker and move to a lender who understands what you need and how they can help you.
Here are some possibilities to explore:
Build up a buffer
In the lead up to your maternity leave, make additional repayments into your home loan to build up a buffer. This is the most financially responsible solution.
Pros: This buffer can sit in your home loan redraw or in your offset account and be used for your monthly repayments. If your loan doesn’t have these options talk to your mortgage broker about putting them in place.
Cons: It’s not practical if you haven’t been able to save enough.
Borrow the buffer
If you have enough equity in your home, top-up your home loan to draw out some cash to give you a buffer to tide you over your leave period.
Pros: If you don’t use it you can pay it back into the home loan.
Cons: Not all banks will lend you more money while you are actually on unpaid leave, so if this is your chosen strategy make sure you do it well before.
Your loan repayments will increase because you owe the bank more, for example if you borrow $50,000 at 4% interest, your monthly repayments will be $240 higher.
Interest only repayments
Change your loan repayments to interest only for a year or two.
Pros: If you have the right type of loan, you can still choose to make principle repayments, but if you have a tight cashflow month you only have to pay the interest for that month. For a $500,000 loan with an interest rate of 4%, your monthly loan repayments would reduce by $720 every month.
Cons: If your loan term is for 30 years, your minimum monthly repayments are calculated so that the loan is repaid in full be the end of the term. So, if you pay just interest for one of those years, then once you go back to principle and interest repayments, they will be calculated over the remaining 29 years. For our example loan above this would be an additional $40 every month for the rest of the loan term.
Some banks charge a higher interest rate during the period that you don’t pay off any principle, so make sure you check with your mortgage broker to check whether this would happen with your loan.
Fix your repayments
Knowing and understanding your family budget during the unpaid leave period is essential, and having the certainty of fixed home loan repayments during that time could be perfect for you.
Pros: If this would help you sleep at night (because your baby probably won’t!) then think about fixing the interest rate of your loan for a year or two.
At the moment, fixed rates are actually lower than variable rates, so it could be a great solution.
Cons: Fixed rate home loans are not as flexible as variable rate loans, so talk to your mortgage broker to make sure this solution works for you.
If you’ve had your loan for a few years already, you should owe less now than you originally borrowed. If you re-finance your loan with another lender, then you re-start the 30 year loan term with a smaller loan balance.
Pros: Your monthly minimum repayments will be lower.
Cons: Your mortgage broker will help you understand whether the costs of re-financing make this a sensible choice for you.
Loan repayment suspension
You may be able to put your loan repayments on hold for a few months.
Pros: You have no loan repayments for the arranged period of time.
Cons: The bank will still charge you interest and it will be added onto the amount you owe, compounding how much total interest you end up paying. In addition to this, at the end of the period, your loan repayments will be re-calculated and will be more than they were originally.
Returning to work
Of course, it’s not just the initial period of leave with reduced or no income that you need to think about. If you return to part-time work your income will be lower, and you may have additional expenses like childcare to pay. So make sure you plan and understand how this will affect your family budget.
As mortgage brokers (and a busy mums) we’ve had lots of experience helping local families with exactly these issues, and we’d love to help you work out the best solution for your family!