Puzzle Finance Blog


Time to take stock of your debt


Borrowers should avoid complacency after the latest rate cut.

Mortgage holders may have breathed a collective sigh of relief this week when the Reserve Bank of Australia again cut official interest rates. But it's essential to keep an eagle eye on your personal borrowing capacity and ability to manage debt. The economic headwinds that lie ahead are unclear and there's no room for complacency.

In fact, the 0.25-basis-point rate cut is an opportunity to review the state of your borrowings and debt repayment schedule. More than ever, you should avoid the following common borrowing mistakes:

Blowing out credit card limits

Credit card limits can shrink your borrowing capacity. Even if you've never used that $24,000 or $38,000 limit a card provider has extended, some lenders view the amount as your total liability. A smart approach is to set limits low and use debit cards.

A strategy that works well for some couples is to put credit cards in the low-income-earning partner's name. It's one way to have the convenience of a credit card without creating a liability.

Stretching beyond your means

Don't blindly follow a lender's borrowing calculations. Only you know the actual state of your household finances and what kind of safety buffer you need to sleep at night. When lenders say they will lend you X amount based on your income, always factor in what could happen if your circumstances change and consider borrowing a lesser amount.

The investors and home owners who get into financial strife are almost always those who've borrowed to the hilt because a bank or finance company allowed them to do so.

Not preparing a budget

Although it is important to borrow within your personal means, there's nothing to stop you trying to increase your borrowing capacity. The caveat is that you need to be confident you will be able to comfortably service the new level of debt. To make the most of your borrowing capacity, prepare an accurate budget that sets out income and expenses, to show that you can afford to take on additional debt.

A budget document showing your cash-flow position isn't just a great planning tool for you. It could influence a lender to increase the amount of the loan it is prepared to offer.

Opting for short-term loans

You may think it's prudent to sign a short-term lease for a new car to pay it off as quickly as possible. Bear in mind, though, that short-term loans come with big monthly repayments and this will eat into your borrowing limits for housing purchases.

Where possible, negotiate the longest loan term you can. This will keep your minimum repayments low on existing loans. Still, you want the flexibility to pay off any loan faster than you have to. If you apply for a fixed-rate loan, consider splitting borrowings in two. When half the amount is fixed and the rest is on a variable rate, you have more flexibility.

Not knowing the funding source

Knowing the source of a lender's wholesale funds may help you avoid paying mortgage insurance. ''Balance sheet'' lenders, such as banks and credit unions, generally fund their mortgage books through their deposit base - they take a percentage of the money held on deposit and lend it out as mortgages. Another source of funding is through the money markets - lenders borrow money at low rates and re-lend it at a higher rate.

Funding by securitisation is a third way lenders get wholesale funds. Tread warily, though. Securitised lenders aggregate a large number of individual mortgages and resell them back to wholesale markets. They often insist all their mortgages be insured, which pushes up borrowing costs.

Posted by Chris Tolhurst - The Age on 6th October, 2012 | Comments | Trackbacks
Tags:

Bookmark and Share

The trackback URL for this page is http://www.puzzlefinance.com.au/trackback?post=26363213


Trackbacks

There are no trackbacks for this post


Comments

There are no comments for this post


Post a Comment

HTML is not allowed in comments, http://... will be automatically linked.


Name (required):


Email Address (not displayed):


Comment (required):


To help prevent spam, please enter the word hair here:

Puzzle Finance Blog

About Puzzle Finance


Archives

September 2017
August 2017
July 2017
June 2017
May 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010

Tags

Purchase or Rent (1)
The Age (1)