How to combat mortgage stress

By Gillian Bullock, ninemsn Money

While the cash interest rate may be on the way down this year, commercial banks may not mirror the Reserve Bank's moves, so how can you make your current home loan more manageable?

Warren O'Rourke, national manager corporate affairs at Mortgage Choice, believes there are a number of ways to reduce the pressure.

For instance, one suggestion is to assess your current loan and consider refinancing. Say you have a loan that offers features such as redraw and offset that you don't even use. You may be better off switching to a basic product which has a lower interest rate. According to Mortgage Choice, a $250,000 loan over 30 years at the standard variable rate of 9.40 percent requires a monthly repayment of $2083.92. The basic variable rate is only 8.81 percent which is $1977.47 a month, saving you $106.45.

Given that every 0.25 percent rise in interest rates equals an extra repayment of $16.92 for every $100,000 borrowed, this extra $106.45 would give you the capacity for a further two interest rate hikes.

Mind you there may be costs involved in switching your loans.

Another tactic might be to consolidate your debts so instead of paying 17 percent on your other debts such as credit card, cars and personal loans, you consolidate them into your home loan and pay the lower mortgage rate.

The danger here of course is that you are turning short-term debt into long-term and you will still be paying off your plasma TV years after you have thrown it away.

Lisa Montgomery, head of consumer advocacy at non-bank lender Resi, warns against using this strategy unless you learn to change your habits.

"If you consolidate your debt and then continue to spend money on credit as you have done in the past, then you will find yourself with exactly the same problems six months down the track," says Montgomery.

For those who have already made extra payments, there might be the opportunity to refinance your loan so your repayments reflect what you now owe on the loan, rather than your original loan amount.

Mortgage Choice's O'Rourke uses the example of your having 18 years remaining on a $250,000 loan carrying an interest rate of 9.40 percent and costing $2083.92 a month but only now actually owe $200,000. By refinancing the loan over the same period at $200,000, you would reduce your monthly payments to $1923.16 and thus pay $160.76 a month less.

However, had you stayed with the original loan, you would have paid back the full amount before the 18 years were up.

Fixing interest rates has always appeared an attractive option in a world of rising rates, giving you certainty on your repayments.

But it may be foolish to fix for five years as rates could come down, your circumstances could change and fixed rates for longer periods can often be higher than variable loans.

So while you may have some peace of mind in terms of repayment you may find it costly to break a fixed term loan. Having a split loan and just fixing part may provide you with a better option as you can then make additional repayments without penalty on the variable part of your borrowing.

Resi's Montgomery suggests you might consider switching to an interest only loan as the repayments drop dramatically without any principal repayment.

But she believes this should only be a short-term measure and when repayments become more manageable, you should revert to a principal and interest loan.

If you are having serious issues in meeting your repayments, then you should discuss a one-off payment variation or permanently reducing your repayments with your lender. It's a much better solution than hiding your head in the sand and failing to make your mortgage payments which could end up with your losing your home.

Visit our mortgage centre to calculate your repayments under different interest rates, compare loans and more.