A drop in house prices across many parts of the country could see some families owing more than their homes are worth. Luckily interest rate cuts may offset this change and give people the chance to make some headway on their home loan despite the reduced equity. So what are some real and significant things families can do to actively reduce their home loan and prevent mortgage stress or at worst – bad credit from late payments?
By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmaybadcredit.com.au.
The Australian Bureau of Statistics reported earlier this month that house prices around Australia have fallen by an average of 4.5 per cent over the past 12 months.
For people who have recently purchased their first home, this could amount to some negative equity – which is quite a frightening prospect for many. For those about to purchase their first home – it could put them off buying all together. But this may not need to be the case. Certainly many buyers in this market should be fairly cautious with where they buy – but it just may be a case of ensuring they look at their purchase as a long term investment – structuring their loan accordingly if possible and allowing for places where they can make extra payments to their loan.
The Sydney Morning Herald recently ran an article titled Extra payments a winner showing how the recent interest rate cut can actually make a significant difference for home owners if they continue to make mortgage repayments at the previous level.
“The 50-basis-point cut represents a $96 a month reduction in mortgage payments for home buyers with an average-size loan of $300,000 (assuming the full cut is passed on).
But for people who can afford to maintain their payments at their current higher level it presents a great opportunity to make inroads into their outstanding principal and build a buffer for tougher times.
Given the uncertainty in markets, and the economy, it is a good strategy to build greater equity in the home,” the article says.
They recommend visiting ASIC’s Money Smart website to calculate the potential interest saved on extra payments to their home loan: www.moneysmart.gov.au/tools-and-resources/check-asic-lists .
The article included this significant advice for borrowers:
A home borrower’s handbook to keep you out of trouble
❏ Know what you can afford. Don’t rely on the lender to tell you what you can borrow. Make your own assessment by writing a household budget with all outgoings and see if there is enough to cover the mortgage repayment. According to Veda Advantage and Fujitsu Consulting mortgage stress reports, the groups that most often get into trouble with repayments are low-income families and young families.
❏ Don’t just look at the rate. According to QBE LMI’s 2012 Australian mortgage market study, when people are looking for a loan they place most emphasis on the interest rate and the fees. Options such as redraw, offset and the ability to split the loan between fixed and variable rates are given a low priority.
❏ Stress-test your loan. Lenders will check to see if you can continue to make payments if rates go up 2 percentage points. What if rates go up 3 percentage points or more?
❏ Watch your credit-card spending. Surveys of people experiencing hardship with home-loan repayments show that large credit-card debts can be the trigger for arrears or defaults.
❏ Make extra repayments. According to ING Direct’s Financial Wellbeing Index, 40 per cent of mortgage holders are making extra repayments on their home loans. These payments serve two purposes: they create a buffer that can be called upon if circumstances require; and they speed up the repayment of the loan.
❏ Invest in your mortgage. A lump-sum payment that reduces the loan principal is, in effect, an investment with a return equivalent to the mortgage interest rate, free of tax.
❏ Deal with problems early. The Legal Aid Mortgage Stress Handbook recommends that borrowers seek advice early from their financial institution or a financial counsellor. Many people leave it too late.
Unfortunately, for those home owners who have entered into a higher interest rate with a non-conforming loan, the interest rate cuts will be negligible for them. They can be up for tens of thousands of dollars more during the first three years of the loan. Our calculations show on a home loan of $400,000 they could be charged an extra $22,867.15 more in home loan repayments over the first three years of the loan. This is based on average loan of $400,000 over 30 years on non-conforming loan interest rate of 9.5% versus the standard variable rate of 7%.
To calculate potential savings people can visit the MyCRA Calculator.
For people considering a non-conforming loan due to bad credit that should not be there, it would be extremely beneficial for them to instead look at disputing the credit listing and having their credit rating repaired. If they were successful in having listings removed from their credit report which either should not be there or were put there in error, they could restore their good credit rating in this instance and apply for a standard home loan – potentially saving themselves thousands.
But instead it is often the case that people get a negative credit listing after a dispute with a creditor or worse – surprise bad credit – and are under the impression they have to put up with the hand they are dealt with. Some contact their creditor, and are told that they can have the listing marked as paid if the account was paid, but the listing is never removed from their credit file. The ‘paid’ listing is unfortunately still going to be a detriment to their ability to qualify for a home loan and they are stuck with the tag of ‘bad credit’ for between 5 and 7 years depending on what’s on their credit file.
However, if the listing was put there unlawfully or unjustly, then the credit file holder does have the right to have those inconsistencies addressed and potentially removed from their credit file. It takes lots of knowledge of the relevant legislation and some good negotiation ability to be able to formulate a successful case to remove a listing. Which is where credit rating repairers come in – to act on the credit file holder’s behalf and enforce that legislation creditors are bound to comply with, helping to demand accuracy in credit reporting and negotiate for the removal of those listings which shouldn’t be there.
In this market – it can make all the difference for a potential borrower – and be a fight entirely necessary to make to ensure people get the home loan they deserve.
For help and advice on credit rating repair, contact MyCRA Credit Rating Repairs on 1300 667 218 or visit our main website www.mycra.com.au.
Leave A Comment