Six things you should do to prevent mortgage default when you lose your job
A sudden job loss is emotionally and financially stressful. If you are saddled with a loan obligation, it creates further financial havoc in your life. Apart from the monthly mortgage payments, the thought of losing your home is devastating. There are steps you can take to prevent mortgage default if you suddenly become unemployed.
Inform the lender
It is a huge mistake when you don’t tell your bank about not having a job any more. “It puts the customer at more risk in the long run,” explains Iqbal Sheikh, head of consumer banking at Ajman Bank. “Banks assess each case individually to identify and offer realistic solutions.”
The buyer should also look into other sources of income, including emergency funds, to stay afloat, says Sheikh. “It is also worth considering a co-signer who can make the initial set/minimum required payments. However, the most important thing is not to forget to update your bank about your termination.”
Work out solutions
A defaulting customer can increase overdues and impact the bank’s financial books. Thus, banks would rather work out solutions with a customer, says Imran Ahmed, product manager at Sharjah Islamic Bank.
“Unlike other loans, home finance is a secured loan, which is backed up by the property collateral itself,” says Ahmed, noting that a bank can reduce the monthly instalment, defer payments until the customer gets a new job or extend the loan tenure to reduce the instalments. Although this is not beneficial over the long term of the loan, it can prove useful in reducing cash outflow.
Avoid new debt
Additional debt should only be considered if the finance needs to be restructured to cover existing outstanding and settle past due amounts,” says Sheikh. “And this should be a last resort.”
The customer should also stay updated on the bank’s policies regarding change of employment and repayment.
Build a buffer
When exiting a company, there is usually a one-time settlement amount. This must be used to build a buffer.
“Do not spend this amount on wasteful expenses and use it as an emergency corpus to ease financial burden,” says Ahmed.
Dip into savings
Calculate your total available savings, including severance package, unemployment benefits and any emergency saving, and create a basic budget. Next, figure out how long you can afford to make your mortgage payments before you run out of money. If you have enough money to last six to eight months and you’re optimistic about finding a new job, you can try living off your savings for a short time.
Set a provision
Always keep an emergency fund of six to 12 months. “All current homeowners and future mortgage borrowers should also consider insurance, especially when they are making significant and long-term financial commitments,” says David Harris, director of distribution at RSA Insurance.
Insurance is not expensive as many might wrongly think, says Harris. The annual cost of an insurance cover would be approximately Dh750-Dh1,644. “The very rationale here is to provide customers with peace of mind when the unexpected happens,” he says.
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