It seems more of the Average Joe’s are able to meet their mortgage payments. The latest figures from Fitch ratings reveal that arrears numbers came down in the second quarter of 2012 and the predictions are that this will continue. This is great news overall for credit debt numbers in Australia. But on the downside, Fitch did say low doc loans and 90 day-plus arrears reached historic highs, and also warns that declining house prices mean recovery in the property market would be slow. We look at the Fitch report in more detail. We also look at why more people may be ‘losing it’ with their repayments into the bad credit zone, and what they could do about it.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

According to Australian Broker in the story ‘Fair dinkum: prime arrears decrease’, Fitch Ratings’ ‘Fair Dinkum’ mortgage performance report for Q2 was positive for mortgage delinquencies:

“Delinquencies in the Australian prime RMBS sector decreased to 1.54%, from 1.6% in Q1.”

Furthermore, the analyst expects arrears to continue to decrease in Q3 and Q4 due to recent RBA rate cuts.

“Lower interest rates should result in improved affordability for existing borrowers and thus to lower arrears levels,” it

[Fitch] said.

However, self-employed borrowers, low doc loans and the 90 day-plus areas continue to cause headaches, although Fitch was keen to stress levels still remain low compared to international markets, particularly the UK and US.

“Delinquencies in the low-doc segment tend to be two, or two-and-a-half times [higher than] those of full-doc loans, but in the 12 months to end-June 2012 they were four-and-a-half times higher,” it said.

It did warn declining house prices remain a threat to the property market overall.

“A significant drop in house prices could negatively affect transactions, in terms of recovery rates and time,” it said.

“As house prices fall, eventual sales prices are more likely to be below the mortgage balance, leading to losses and claims under lenders’ mortgage insurance (LMI).”

For those many Australians looking to make their home loan more affordable and meet the repayment deadline every time, the recent interest rate cuts (and more if passed on!) should go a long way to help.

But it seems the numbers of those who are in arrears far enough to cop a default on their credit file – those in crisis mode with 90-days or more owing on their mortgage – are at a record high. What is happening to lead more groups of people in to crisis mode? Job losses? Over-commitment? Irresponsible lending in the past? Illnesses?

It could be all of those things or just one which leaves a home owner in dire straits with their mortgage.

What happens to those people that reach 90 days in arrears?

Hopefully that situation never happens to you. But if it does, what would you do?

If you’re smart, you’ll apply for financial hardship with your bank as soon as you find out you are having difficulty making payments. They may be able to restructure your repayments to more affordable levels temporarily until your financial crisis is averted. They may also be able to put a halt on any defaults they were going to issue to your credit rating.

If you can’t apply for financial hardship; aren’t approved for a variation in your repayments; or don’t know about your financial hardship options – then you will be defaulted.

This means you will carry a black mark against your name for 5 years. This is irregardless of whether you have a windfall and are able to get up to date with your payments or even if you get ahead in the future.

This black mark will mean you are virtually banned from mainstream credit for the term of the default. So credit cards, loans and even mobile phone plans are near to impossible to get. Unless, you go with a lender who is able to factor in the risk of lending to someone with ‘bad credit’, but understand, you will pay much more for this type of loan.

On an average $300,000 home loan, you will pay over $15,000 extra in interest on a bad credit loan when compared with a mainstream lender. This is just over the first three years at 9% bad credit loan vs 7% standard loan. See our interest calculator to find out how much extra you’ll pay. Then there’s the other credit – credit card interest, payday loans – they’re all at higher rates.

Imagine the cycle some people in this situation can get into. It’s a domino effect. More charges mean more difficulty making payments. Soon one default can then lead to another and another. Before people it they are filing for bankruptcy or having their homes repossessed.

We are looking to educate consumers about three things to do with credit:

1. If you can’t afford the credit, don’t get it. This sounds simple but is actually not easy to determine. Your best bet if you’re unsure what you can afford, is to seek some budgeting help. But don’t just hope for the best – because life happens – doesn’t it?

2. If something happens and you can’t afford what you used to be able to afford – stick your hand up and ask for help with your Creditor as soon as possible.

3. If you have bad credit, and you don’t think it should be there  – save yourself thousands and dispute it.

Even if you’re just not sure, it would be worth getting your credit file and case assessed by a credit repairer to determine your suitability. For professional help with disputing your credit rating (which will give you the best chance of having your bad credit removed from your credit file completely) contact a Credit Repair Advisor on 1300 667 218 or visit our main website www.mycra.com.au.

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