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Personal debt level linked to 'mortgage stress'

31/05/2010

Mortgage holders are being urged to assess their personal debt levels to ease – or avert – “mortgage stress”.

According to Smartline Personal Mortgage Advisers’ Managing Director Chris Acret, it was actually “personal debt stress” that exacerbated mortgage repayment pressure.

“Mortgage stress is a much-touted measure of how debt is impacting lifestyle, but it’s often personal debt that is the root cause of the problem, rather than mortgage repayments alone,” Mr Acret said.

“For many, it’s far more likely that the combination of mortgage repayments, personal loan repayments, credit card debt, store cards, school fees and the like, when combined, create the stress.

“For example, a mortgage holder with a home loan of $300,000 at 6.2 per cent means their monthly principal and interest repayments would be $1,837. If you add a $20,000 personal loan at 13.5 per cent over five years with repayments of $460 per month, and a credit card balance demanding repayments at 18.7 per cent, you can see how personal debt can make a significant impact on your overall debt levels.”

Mr Acret said it was important for mortgage holders to clear personal debt as a priority.

“While your home is an asset, its value depends on the state of the housing market and on how much of the mortgage has been repaid,” he said.

“In recent boom times, many householders borrowed 95 to 100 per cent of the value of their home to purchase the property as well as obtaining additional credit or similar personal debt.

“If your home’s value hasn’t increased in value, therefore, it hasn’t built enough equity since you borrowed to fund the purchase, and a large proportion of your income is being directed to personal and mortgage debt, homeowners may find themselves stretched as interest rates rise.

“Ultimately, managing all this debt hinders your cashflow and, in an environment of increasingly tighter lending criteria, it is proving difficult to refinance – particularly if you have a large sum of unsecured personal and credit card debt.”

Mr Acret suggested mortgage holders regularly review every aspect of their financial situation – not just mortgage repayments – to ease or avoid financial stresses related to both personal and mortgage debt.

“As well as making a concerted effort to pay off personal and credit card debt as quickly as possible, it’s also important to establish a budget if you don’t already have one – and if you do have one, reassess your spending habits and work out where you can make savings,” he said.

“Also, consider how you might consolidate your debt – an experienced mortgage adviser who knows the current state of the lending market can work through your options and create a loan structure that’s right for you and your circumstances.”

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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