Are you or a loved one hoping to start a family or expand your tribe? Risk management is a vital aspect of your financial strategy (including property planning) during this joyful, albeit sleepless, phase of life. The value of financial security and peace of mind is priceless for any young family.
Property Planning Australia’s Managing Director David Johnston offers some wise advice about planning your finances, property and loan commitments during an income transition period, so you’ll be well placed when your little bundle of joy arrives.
Property Planning Australia has been experiencing a ‘baby boom’ of late: several team members are awaiting visits from the stork (all the best Rich who is due to become a dad any moment) and another team member has returned from maternity leave in recent months (welcome back Gurjeet!).
With babies top of mind, our interest was peaked by recent media coverage highlighting the difficulty faced by stay-at-home mums in qualifying for home loans. With the crackdown on ‘responsible lending’ guidelines by ASIC, unfortunately expectant families have been caught up in tighter lending restrictions.
Domain.com.au shared the story of new mum Nina Young from Sydney whose home loan application was turned down simply because she was on maternity leave. The bank didn’t seem to care that Nina and her partner had the 20 per cent deposit nor that Nina was receiving 18 weeks of government parental pay and had a letter from her employer to state her intention to return to work.
Property Planning Australia’s Managing Director David Johnston says Nina’s experience shows why it’s best to have a ‘game plan’ for your financial and living situation – whether you have a mortgage, rent, live in your own home or want to buy a new place – well ahead of a baby’s arrival or other major life change.
“Amid the excitement and emotion that news of a new addition to the family evokes, expectant parents can overlook how maternity leave may effect their ability to afford their rent, mortgage and other expenses,” he said.
“Whether you’re seeking a new loan or want to vary the terms of your existing loan, it’s optimal to apply when you’re still earning maximum income.
“The reality is lenders are purely interested in how your financial situation looks on paper at the precise time you submit your application – not at how it looked in the past or how it might be in a year or two (after a break in income).
As with most changes that create more restrictive lending policy, banks tend to overreact initially to ensure they meet their obligations and then find a more common sense balance over time. This has occurred to some degree now with certain lenders still lending to expectant parents planning on taking maternity or paternity leave. The criteria that couples need to meet are: a loan-to-value-ratio (LVR) under 80%; a letter from their employer confirming income details and expected return to work date; and an outlined plan for how they will manage to meet repayments during the period of reduced income.
“If you already have a loan, but some financial respite would be helpful, there are several ways you can reduce your repayments, such as extending the loan term, changing to interest-only or renegotiating your interest rate.
“We encourage clients to contact us before making a major life change, such as starting a family – firstly, so we can congratulate them and share in the exciting news and secondly, so we can discuss a property plan and strategic financing solutions to provide financial security.”
David’s tips for managing and ‘risk-proofing’ your finances during early parenthood or other major life changes:
1. Think forward and plan for what’s ahead: conduct a thorough review of your finances with your trusted adviser and determine how your budget would cope if your income reduced after having a baby.
2. Build in or plan for a reasonable ‘buffer’ on your home loan amount as a safety net. We need to get our heads around the fact we might tread water or even go backwards financially whilst on reduced income. Like with most property planning and money management, getting our mindset right is as important as the practical actions. Significant cash reserves provide greater comfort during times like this.
3. Consider restructuring your loan to interest-only repayment or increasing the loan term so that you can channel as much cash as possible into your redraw facility or savings offset account to further build your buffer. This also provides more breathing space around your minimum repayment during this period.
4. Consider fixing part of your debt to provide certainty around repayments for a period of time.
5. If you’re child-free when buying a home, but hoping to have a family, it’s important to select an asset that will suit your changed lifestyle when you become parents e.g. functionality for a family, proximity to child care facilities and schools. A common way people lose money on property is purchasing the wrong home to meet their mid- to long-term family and lifestyle needs. This means they need to sell before compound capital growth has kicked in. Due to the considerable costs of buying, selling and then buying again, often little – if any – money is made through the process.
6. If you’re renting, perhaps offer to sign a longer lease at your current rent price to ensure you are able to minimise upheaval during this wonderfully disruptive time of your life.
7. It is best for couples to apply for a home loan or change to a different mortgage well before a baby comes on board (but surprises can happen!) or early into the pregnancy when both partners can demonstrate stable, permanent employment and maximum income.
8. Protect your assets, income and yourselves by reviewing and adjusting your risk insurance i.e. income protection, trauma insurance and life insurance. While you are in the headspace for protecting your family and your health, your greatest asset, have you completed a will? Now that you have extra family members, a will is important to round out your risk management strategy.
Ask Property Planning Australia for advice about your specific circumstances – as we always say, ‘one size doesn’t fit all’. As outlined above, there are many options available. Click here to contact us to discuss some of these risk management and strategic financing strategies and how they might fit into your overall property planning for parenthood or your next major life change.