by Angeline & Paul HO
A common mistake for borrowers is that they enter into a home loan assuming they will continue to continue earning the same salary or even factoring a pay raise each year.
In today’s environment, where jobs are at risk of being overtaken by robots, Artificial Intelligence AI, Automation, the assumption no longer holds. You have to be prepared for all scenarios including retrenchments and pay cuts.
What if you find yourself in a situation where you can’t afford to pay your mortgage payments? What are your options?
First, don’t panic and keep a cool head.
We list 7 options for your consideration.
- Talk to your banker
Rather than worrying and losing sleep over the matter, it is best to talk to your banker (off the record) as soon as possible to find out your options and if something can be worked out with your bank, e.g. extending loan tenure and lowering mortgage payment.
But please do not sound distressed... And definitely, do not submit a lowered salary. Often banks will ask you update your latest salary. Once you update you are jobless or if you have a reduced salary, you will be in DEEP Trouble!!!
Scenario of a Reduced Salary - What Information you cannot volunteer to the bank
If you have several personal loans. Let's say your outstanding personal loans are $60,000 repayable over a 5 year period. Including interests, you are paying about $1300 a month over 60 months. When you took these loans, your salary was $5,000. $60,000 is 12 times your monthly income. Let's say you took a pay cut and ended up in a new job at $4,000. 12 times $4,000 = $48,000.
If you receive any periodic updates from the banks promising super good offers and deals and ask you to update your salary, please do not be so foolish to update your reduced salary.
Sometimes this can come in the form of a credit card application, please do not apply for a credit card and then end up revealing your latest salary.
Table 1: Unsecured Credit Limit is capped at 12 times monthly salary starting from 1st Jan 2019. (MAS), (Appendix 1)
A pre-emptive credit limit is imposed from 1st Jan 2018 for those with high outstanding debt to 12 times, so as to get them ready for 1st Jan 2019.
Once you exceed 12 times your salary, the bank or banks may collectively come after you and ask you to reduce your debt to 12 times monthly income.
This may lead to you having to immediately Pay up Personal loan by $12,000.
You have to REPAY, maybe immediately...
If finally you are stuck and there is not much avenues to pay back your loan, you should immediately discuss with the bank to do Debt Restructuring. This will damage your credit record, but this is much much better than a DEFAULT situation.
- Talk to other bankers
Know your options. While refinancing your home loan with another lender may involve fees if within lock-in period, it may make sense if the terms offered are better than those offered by your existing lender. Start talking when you are not yet in crisis mode, it will be too late if you are already impacted and banks will be even harsher on you. Try asking them to reduce the rates, they will tell you, "Take it or leave it". Banks are not emotional, they act on current information and make their decisions based on that.
- Get a tenant
One way is to earn extra income with your property such as getting a tenant for your home or renting out an extra room. While this may cause inconveniences if your family needs the space or you are used to living on your own, it may be a solution to paying off your mortgage and relieving your financial burden.
- Downgrade to a smaller home
You can attempt to sell your current home on your own terms and downgrade to a smaller home. This is a prudent move and will help you better manage mortgage payments in the long run.
- Borrow from friends/family
Depending on situation and personal network, you can also choose to borrow from friends and family. This means putting down your pride and could hurt your relationships. But it is possible to work it out if managed well. Be realistic and structure it well, prepare proper loan or IOU document and state clearly how you intend to repay the debt. This will give you a lot more credibility. Most borrowers expect people to help them while they do not give any collateral nor guarantees nor interests to friends who helped them. Ultimately the borrower becomes the KING after the money is borrowed, where the lender BEGS him/her to repay the money, often without interest. This is the surest way to burn your bridges.
In the event that you can’t work out an alternative with the lender, the lender may turn to foreclosure, which refers to the legal process by which the lender attempts to recover the balance of the loan by forcing the sale of the home. Selling your home may be the best option if the property market is favourable and you are in deep financial distress.
Declaring bankruptcy is an option but perhaps of last resort as it taints your credit record and career. Bankruptcy refers to a legal status when you can’t repay debts of more than $15,000. According to the Ministry of Law, the High Court usually appoints the Official Assignee to administer the bankrupt’s affairs in bankruptcy, including sale of bankrupt’s assets to repay creditors.
In summary, know your situation and your options to make a decision best for you and start to refinance home loan now, before your finances deteriorate, do not wait till you are in trouble before you come to us.