Covid-19 has introduced an enormous dose of uncertainty into our lives. But the truth is things are always uncertain. It’s just that the last period of time has brought it more into focus.
As a mortgage broker in Dublin, we regularly advise our clients to run stress tests on their finances.
A stress test is a way to see how your finances would hold up if your circumstances changed suddenly.
While the name might have the word “stress” in it, running a stress test once or twice a year can actually give you peace of mind.
You will know what you need to plan for. And be able to make new arrangements in case you ever need them.
Stress test your mortgage repayment
Unbeknownst to you, you’ve already gone through a stress test when it comes to your mortgage.
And that was right at the beginning when you first submitted your mortgage application.
Lenders take their due diligence seriously and will go through your mortgage application with a forensic attention to detail.
They are doing this to protect both themselves and you.
Firstly, they have to ensure that they are lending their money to an individual or couple who can pay them back.
Secondly, rules set by the Central Bank also hold lenders accountable for lending responsibly. These rules are designed to protect citizens who are seeking mortgages.
In other words, to ensure that you don’t borrow more than you can realistically afford to pay back.
This is why you have to submit so much paperwork when you compile your mortgage application.
Once you have your mortgage, it’s also up to you to stress test your finances.
How capable are you of withstanding a financial shock?
Examine your income security
As much as your mortgage application will provide an accurate summary of your finances, it also reflects just one moment in time.
Many thanks can happen to impact your income security.
These can be both macro and micro.
From a macro perspective, economies can suddenly plummet. We saw this in the credit crunch, that became the recession, in 2008. More recently, we have seen how the coronavirus had the ability to close large swathes of the economy.
From a micro perspective, your own company might experience difficulties or you may be made redundant from your job.
Admittedly, these are not pleasant thoughts.
But keeping your head in the sand won’t mean that they won’t happen ever.
It does mean that if they do happen, you won’t have a plan in place.
So it is better to be prepared.
Build up an emergency fund
Saving money into an emergency fund will do a lot to reassure you that you can withstand financial shocks.
Having six months worth of expenses is an ideal “war chest” to save, but don’t be intimidated by the size of this.
Even saving small amounts consistently will add up.
The way to approach an emergency fund is to prioritise it.
Save into this fund as though it is one of your monthly commitments.
Nurturing your career and creating additional sources of income (also known as side hustles) are also ways to strengthen your finances.
Monitor your spending
Living within your means is another strong way to ensure your finances can withstand a sudden change in circumstances.
Don’t make the error many people do of stretching your finances to the absolute limits.
If you do this, it might be possible to keep your repayments up to date while things are still getting along smoothly. However, the moment anything changes, even something as simple as an interest rate hike, you could be in real trouble.
Sticking to a monthly budget will help you ensure you live within your means.
Keep a track of all of your expenses, from your mortgage repayments to your transport costs to child care to groceries and utilities.
Remember that owning a home means you will have maintenance costs to contend with. As far as possible, always pay for these out of savings. Sometimes you might have to borrow, but keep this to a minimum.
Not all debt is bad.
By the same token, not all debt is equal.
And credit card debt is a big problem.
If you’re not paying off your credit card balance in full at the end of every month, take that as a stress test sign that your financial management needs some attention.
When you stress test your finances, you’ll know where you need to start taking action.
Do you need to save more consistently?
Do you need to eliminate credit card debt?
Do you need to create a household budget?
If you’d like to have more money in your household budget every month, consider switching your mortgage. We can help you every step of the way. Contact us for a no obligation chat.