Unsecured debts are the main cause of mortgage stress
February 16. 2008
DEBT advisers say unsecured debts are the main cause of mortgage stress, rather than rising interest rates. Payment defaults increased 35.5 per cent last year, according to the credit rating agency Veda Advantage.
Many households are choosing, or being forced by interest rates or debts, to refinance their mortgages to pay off debt.
In December last year, one in three new mortgages were refinancings, according to latest figures from the Australian Bureau of Statistics.
Debt consolidation into a loan or transferring card balances to a lower-rate card are options many are weighing up.
For those who cannot possibly meet their repayments, a debt agreement under the Bankruptcy Act may be the best course of action.
Clifford Mearns, an adviser with debt administrator SRMC Ltd in Brisbane, said families struggling to repay their mortgage were often overloaded with credit card debts.
"I don't believe, per se, that a $15-a-month increase in repayments on the home is the problem," Mr Mearns said.
"The root cause of many people's problem is the household debt they can't service.
"While they are trying to service their household debt, they are having a great deal of trouble servicing their mortgage."
Mr Mearns said people should get their household debt in order first before they consider any action to tackle their mortgage problems.
Debt consolidation is often offered as a solution. Traditionally this is done via a personal loan, but increasingly people are turning to credit cards to consolidate debts.
Credit card companies are targeting the consolidators with attractive low and zero-interest rate offers on balances transferred from other credit cards.
"After car purchases, debt consolidation is the second most popular reason for taking out a personal loan, but credit cards are challenging this with very appealing zero per cent balance transfer offers," Cannex senior financial analyst Harry Senlitonga said.
At present, 15 credit cards offer an initial nil interest rate on balances transferred from other cards. Two of the cards offer the rate for four months, and the rest have six-month honeymoon periods. Many other cards are offering low rates on transfers. Only one of the cards extends the zero rate honeymoon period to new purchases as well as balances transferred from other cards.
Mr Senlitonga said that getting a credit card was a simpler process than getting approved for a personal loan, and this was the main reason they were taking over as the preferred option for debt consolidators.
"In some cases, you don't even have to show 100 points of ID to get a card," he said.
Consumers could be better off using a zero-rate card for consolidation, he said, but only if the card was not also used for new purchases.
Comparing the two options on a debt of $10,000 to be paid off over three years, the zero-rate cards come out slightly cheaper than a 9 per cent personal loan.
But the consumer had to be disciplined and committed to the repayment plan.
"You may start out with the purest of intentions, but if there's even the slightest chance of you relapsing and using the credit card again, repaying late, not repaying as much as possible during the introductory period or, worse still, making only the minimum repayment required, forget it," Mr Senlitonga said.
"It may be slow and steady, but if you can't trust yourself with a credit card, a personal loan will get you over the debt finishing line a lot sooner."
Mortgage refinancing is a popular option for people with high consumer debts.
Home owners who have built up equity can combine these debts with their home loan in a new, bigger mortgage.
The advantage is you can reduce the number of debts down to just one – the mortgage. And your consumer debts with high interest rates will become part of your mortgage and be charged at the lower home loan rate.
The downside is that interest is charged over a longer period. A mortgage can last up to 40 years, so more interest will be paid on the original debt in the long run. Mr Mearns warns that the option is not available to many households already struggling. "With the rising interest rates, refinancing is just not affordable for many people," he said.
High credit debts and even high card limits could affect your ability to access finance, according to the Mortgage and Finance Association.
"Lenders assess a range of risks," said MFAA chief executive Phil Naylor.
"A simple way to increase your borrowing capacity is to lower your credit card limit. In the eyes of the lender, the higher your credit card limit, the more chance of you getting into difficulty. A low limit reduces the risk of defaulting on a loan repayment."
Debt agreements (under Part 9 of the Bankruptcy Act) are often marketed as an easy debt consolidation option, but they are just one small step away from full bankruptcy. The debtor must declare themselves legally insolvent and will be listed with the bankruptcy trustee for seven years.
"It will hurt your credit rating for that time," Mr Mearns said. "But sometimes that price can be lived with. And in the current economic climate, a lot of people are opting for that solution."
BY Jason Bryce
Source
http://www.news.com.au/couriermail/money/story/0,,23223714-5015825.html |
