Homeownership Challenges

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According to recent news reports, mortgage interest rates are set to rise drastically as a result of the interest rate increases on Bank of Jamaica (BOJ) securities. Financial institutions will have to raise the interest rates paid on deposits in line with market rates, and therefore they will be forced to charge more for loans.

How will these developments affect Jamaica’s housing market? According to real estate industry experts, increases in mortgage costs will have a negative impact on both existing and prospective home owners.

BOJ data revealed that up to June 2008, the amount of mortgage loans in arrears for three months and more had risen by some 71 per cent over the previous year. Delinquency rates are expected to grow even more as the cost of homeownership increases. In addition, most consumers’ income levels are not moving up to match these increased finance costs, so many hopeful homeowners may not have the cash flow required to qualify for a mortgage.

What can you do to keep your homeownership dream alive, or to prevent your real estate investment from becoming a financial nightmare? Let’s look at some practical strategies:

Existing homeowner

1. Don’t wait for the ball to drop – call your mortgage lender immediately and find out if they plan to increase interest rates and by how much. Most financial institutions need to give notice to their customers of proposed increases, so you might have a breathing space of two – three months before it takes effect.

2. Once you receive the new monthly payment amount, re-examine your budget to see if you will have the cash inflow to deal with the increased expense.  If you’re already finding it hard to make ends meet, cut back on some expense items so that you can meet your mortgage needs.

3. If you won’t be able to pay the increased costs, you may need to find a way to earn from the property. Can you rent part of the premises, or if necessary, temporarily move out and rent the entire property to cover the extra costs? If your home is already rented, is it possible to raise the rent to counter the increase in mortgage? Remember that your tenant may also be having financial difficulties, and you don’t want to end up getting stuck with a delinquent renter.

4. If your situation is drastic enough, you may be forced to sell the property to get rid of the debt. Unfortunately, due to the current soft real estate market, you may have to reduce your asking price to get a quick sale. Selling your home might be a tough decision to make, but if you can’t meet the mortgage payments for an extended period, you could lose it anyway through foreclosure.

Prospective homeowner

1. It is even more important for you to examine all the costs of buying a new home to see if you can really afford it at this time. Do you have enough savings to cover the deposit and closing costs, legal fees, relocating costs, renovation costs, as well as the recurring insurance, tax and maintenance expenses?

2. Do not deplete all your emergency expenses in your attempt to buy a home. It’s too risky now to take that chance, as you will need to have at least three to six months of your basic expenses saved up to cushion any financial uncertainties. If you don’t have excess funds saved outside of your rainy day account, keep putting aside money every month into a special ‘home ownership’ account until you achieve your target.

3. Weigh the advantages and disadvantages of buying against those of renting a property. Is it more economical at this time to stay in your rented home? While buying your own home can give you a sense of security, it requires a substantial financial outlay and your monthly expenses can end up costing more than the rent.

4. You also need to consider your future financial stability. Are you comfortable that your source of income is secure? Are you in a sector that might be negatively impacted by the global financial crisis? If you are unsure about the permanence of your expected cash inflows, then it might be wise to re-consider if this is the best time to buy a home.

Although you might feel despondent that your housing dream might be in jeopardy, remember that in times of challenges, there are always opportunities for some people to profit. The tide has turned in Jamaica’s real estate industry and unlike past years, it is now a buyers’ market. There are several people who may desperately need to sell their property. If you have been saving and preparing to buy a home, or have disposable cash to invest in real estate, this could be the right time for you to get a good deal.

Copyright © 2008 Cherryl Hanson Simpson.

Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com.

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