What would happen to my mortgage if I lost my job?

We were recently asked during a loan application process “What would happen if I lost my job?”
It’s scary to think about this possibility when you’re just starting the journey of home ownership. It is important however – after all a mortgage is usually your biggest investment.

So how do you avoid being one of the 39% of Australians who don’t have enough savings to maintain their lifestyle for 3 to 6 months?

We’ve all heard the famous saying ‘Failing to plan is planning to fail’. We all need to be prepared beforehand rather than be blindsided when the unexpected occurs. This requires taking action sooner rather than later.

Q. What can you do beforehand?

Before you do anything you need to determine how long it may take you to find a new job. This will often depend upon the type of industry you work in and whether you will need to look for a new career. You should add some extra time to be safe. Don’t be surprised if it takes 6 months to a year – or even longer. Now that you have estimated how long you may be out of work, what are your normal living expenses, including your new mortgage payments?

Once you know how much you need in reserve, establish a savings plan to build this over time. Potentially the best way to do this is with a loan product that provides for either an offset account or a redraw facility. The objective would be to set aside additional funds that are paid into either the offset account or the mortgage with each repayment. Within a reasonable period of time your safety net can be established.

In the unforeseen event of losing your job you would be able to withdraw regular amounts from the offset account or mortgage redraw facility to fund your living expenses.

Q. What if it takes too long?

If you don’t think you will be able to establish the safety net within a reasonable period of time you could look at taking out an insurance policy that could partially help.

Consumer credit insurance
This insurance generally does cover you for involuntary redundancy but the cover does have a limit with most being less than 3 years.

Importantly, this insurance normally needs to be taken out at the time of the mortgage and will only cover the mortgage repayments. It will not cover your other everyday expenses.
Income protection policies
Some income protection policies cover involuntary redundancy. You need to be careful though – there are more policies that don’t than do cover redundancy. They also generally have limited cover – most likely for only a period up to 12 months. Most income protection policies only cover you for up to 75% of your income so there will be a shortfall.

Q. What if I fail to plan?

We’ve heard the saying ‘Closing the door after the horse has bolted’ but all might not be lost.

The first and most important thing you should do is contact us immediately, even if at this stage you only feel redundancy is looming. We can explore your options.

Lender assistance

Some lenders have a hardship policy that may allow you to reduce or defer repayments for a period. This could range from 2 to 13 months depending on the lender when you entered into your loan and your individual circumstances. Your eligibility has to be approved by the lender and conditions will apply.

If your request is refused you have the right to make a complaint to your lender or lodge a complaint with the Financial Ombudsman Service (FOS).

Clearly, the best option is being well prepared as this will provide greater certainty at a time that will already be stressful.

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