The Reserve Bank has raised the official interest rate several times since November, to control inflation. It's now at the highest level in 12 years.

What's worse, the big banks are lifting their home loan interest rates by more than the official increases to cover their costs. Basic variable home loan rates are now sitting at more than nine per cent.

Stand your ground

Property prices are falling in many suburban areas around Australia as higher interest rates force people to sell up. According to Australian Property Monitors, the median house price in Sydney's southern suburbs has dropped $55,000 since the top of the property boom four years ago.

Talk of rising interest rates and falling house prices is enough to spook anyone, but don't panic.

For many people their home is their biggest asset. The last thing you want to do is get rid of it in a hurry. You risk losing the equity you have built up in your home if you sell it at a discount in a tough market, so try and hold on to your house until prices recover.

Property generally runs in seven-year cycles, with the market expected to pick up in 2009 or 2010.

Payment priorities

Unless you were clever enough to fix your home loan interest rate a couple of years ago, your mortgage repayments have probably doubled in the past year or two. As painful as this is, you have to focus on staying on top of your repayments. If you don't, you run the risk of your bank foreclosing on your mortgage and selling your house. Mortgagee sales usually see houses sold for well below market value.

So not only do you lose your home, but you often lose the equity in it and may still be in debt after the sale.

Survival strategies

If you are unable to meet your home loan repayments, and believe the bank may sell your house, you have to take drastic action.

Rent

The easiest thing to do is move out and rent out your home to help cover the mortgage. There is a rental crisis in many of the capital cities, particularly Sydney, with low vacancies and skyrocketing rents.

Take advantage of it. Move back in with your parents or relatives or, if location or relationship issues prevent this, rent a smaller, cheaper place.

Budget basics

Renting out your house is only the first step of action. You also have to address your financial situation.

Geoff's Dollar Diet on the previous pages is a great way to think of your expenses and earnings. Make a list of everything you spend money on. You will be stunned at how much money you spend on some things!

Create your budget according to your pay period, whether it's weekly, fortnightly or monthly.

On one side of the page, list your sources of income for the period - everything from your salary to government benefits to any money from investments - and total the column at the bottom.

On the other side, add up your expenses for the period, including things like food, your mortgage repayments, transport and utilities.

Look at the totals of the two columns and see whether you are over budget (your expenses exceed your income). If you are, look at your budget and work out how you can change your spending habits and cut back on your expenses.

Increase your income

You've seen where the fat from the two families who went on our Dollar Diet was trimmed, but if you're still struggling to reduce your expenses, try and increase your income.

Think about getting a second job in the evening or on a weekend until your finances are under control. You could also try getting casual work such as cleaning, babysitting or lawnmowing.

Talk to your bank

If you have tried renting out your house and trimming your budget, and still can't meet your repayments, contact your bank. Explain your situation and apply for a repayment holiday, or lower repayments, until you get your finances under control.
Show them your budget and say how you plan to cut expenses or increase income. Banks would rather work with you than get a surprise at the end of the month when you don't make your mortgage repayment. They will make more money keeping you as a client than cancelling your mortgage and selling your house.

Hope is in sight

Interest rate increases over the last few months have steadily pushed up home loan rates, but we may get a reprieve later this year. Some economists say slower economic growth may encourage the Reserve Bank to sit back and keep interest rates on hold for the rest of the year.

The central bank has been raising rates to bring spending and inflation under control. However, in their most recent statement, the Reserve Bank wrote there is tentative evidence that demand is easing, which is a good thing.

International issues

While there are some signs official interest rates are close to peaking, it's not all positive.

The credit crisis in the United States has raised financing costs around the world. Our banks are being forced to pay more to borrow the money that they then lend. They are passing those higher costs onto us, and that looks set to continue.

For more money advice, check out the latest issue of New Idea - on sale now!