Tips for staying on top

MORTGAGE stress seems to be the new buzz word but here in Australia this is not caused by higher interest rates.

I was fascinated to read a report from one of Australia's largest mortgage insurers, Genworth Financial (it insures 20 per cent of all home loans), which analysed 1000 of its hardship claims. The main reason for hardship in meeting home loan repayments is not over-commitment on the mortgage, it's illness or injury.

That's followed by losing your job, suffering a pay cut, losing an income through maternity leave and relationship breakdown. Over-commitment on the mortgage accounts for just 2 per cent of all hardship applications.

So the most important safety net for your mortgage is protecting your income from the unexpected.

It reminds me of a survey from the Bureau of Statistics years ago which found only 20 per cent of people retired when they had planned. So many Australians leave retirement planning to the last minute because they have these grand plans to retire at a particular age.

For the other 80 per cent, the decision is taken out of their hands and they're forced to retire earlier because of retrenchment, illness, injury or death.

Inevitably, their retirement finances are then caught short and their lifestyle is affected for the rest of their life.

The moral is to start retirement planning as early as possible to protect your future lifestyle.

It's the same with protecting your home loan in tough times.

The priority is maintaining or boosting your income. So your strategy for when interest rates are rising and the economy slowing should be: Keeping in the boss's good books to make sure you're not part of any retrenchments;

* Not being too greedy in terms of pay;

* Assessing whether your industry has strong growth prospects and, if not, moving to an industry with better prospects;

* Improving skills;

* Earning extra income through a second job or turning a hobby into a business; and

* Building a fund to cover unforeseen circumstances or if there's the possibility of going to a single-income family with the arrival of children.

Insurance can also play a key role in protecting income flow. During tough times, we often prune insurance cover to save money. Research shows we should be doing the opposite. If we cut off that income lifeline, or life cuts it off for us, our current and future savings, along with the home loan repayments, are in jeopardy.

What would happen to your family if you fell under a bus or contracted a fatal illness? Social security isn't going to cover your lifestyle and the benefit from your super fund will not help for anything but the shortest time away from work.

There are three ways you can protect your family if you die or suffer a disability that will prevent you from earning a living. In order of importance, they are: Income protection insurance, which looks after your salary if you can't work. Provided you are already employed and earning an income, it can be taken out to protect up to 75per cent of your gross salary if you are unable to continue working due to total or partial disablement, sickness or accident. The benefit is paid as an income stream, the premiums are tax deductible but the payout is taxable. But the devil is in the detail: the definition of disablement can change between policies.

Life insurance is a lump-sum payment to beneficiaries. If you and your partner are both working, ask yourself: "Could you pay the mortgage if they died?" If the answer is "yes", then maybe you don't need life insurance. If you want to keep your lifestyle if anything happened to your partner, then you would need to take out life cover on them.

Trauma insurance; is a lump-sum payment if you contract a terminal illness. Make sure you check what's covered and the definitions.