In the homeownership-obsessed First World, mortgages are often among the first to suffer when things go awry. Australia is no exception: a report by Fitch Ratings showed that in the first quarter of 2011, 1.79% of all Australian mortgages were behind by more than 30 days, a record high. And that’s only counting the prime sector, where interest rates are at par with the market ideal. Factor in the sub-prime market, where rates are higher and borrowers are less affluent, and the figures could be much bigger.
To be sure, credit card debt isn’t the only culprit. The Fitch report also pointed to the interest rate hike in November 2010 and the Queensland floods as major factors. But the previous quarter also saw Australians putting the bulk of their Christmas buys on credit. Now the holidays are long over, but the debt grows bigger by the day—and that’s in addition to mortgage obligations.
Understanding refinance and consolidation
To cope, many Australians are turning to refinance loans. This basically involves taking out a new loan to pay off one or more old ones. Most people do this to take advantage of lower interest rates on other banks. The Reserve Bank recently decided to keep rates steady for the moment, so many homeowners—particularly those with adjustable-rate mortgages—are switching over before they go up again, as they did last year.
Balance Transfer Card
The Citibank Clear Platinum Card is currently offering an interest free introductory offer on balance transfers. This means you can transfer any existing credit card debt and pay it off within 9 months. Once you have paid off your balance you can use this card for purchases as it features a low ongoing purchase rate
- $99 p.a. annual fee
- 0% p.a. for 9 months (reverts to 14.99% p.a.) on purchases
- 0% p.a. for 9 months on balance transfers
- Cash Advance Rate of 21.74% p.a.
- Up to 55 days interest free
- Minimum Income Requirement of $35,000 p.a.
Many lenders have also started offering refinance deals on credit cards and other personal debts, such as car loans. You may even be able to consolidate them into one refinance loan, so you only have one bill to pay every month. These loans usually take five to seven years, depending on how much you owe.
Does it work?
So how much can refinancing really help? Will a lower interest rate really make much of a difference for a debt in the six-figure range? How about for minuscule ones, say under $500? According to Choice, a consumer advocacy magazine, it’s not so much the amount you owe as it is the way you pay it. Even a few hundred dollars can take a lifetime to pay if you make little more than minimum payments, they said. Refinancing forces you to do more than that, so it can help get massive debt out of the way.
That being said, refinancing and debt consolidation aren’t always sweet deals. For one thing lenders and brokers sometimes get commissions for selling to switch loans, which means they can make a few misleading claims. If you’re after better mortgage terms, they recommend selling your home instead—not only do you get to set the terms, you can also end up with extra money to knock down other debts. If you do opt to refinance, don’t just take anyone’s word. Do the math by using a multi-loan calculator to get an idea of how much you can save.
Debt consolidation is even trickier, as it’s much less regulated. Private companies can charge exorbitant rates, taking advantage of borrowers’ often desperate situations. Others impose complex terms, according to Choice, such as refinancing into a line of credit into which your earnings are directly deposited, and making everyday expenses on a credit card. Known as equity loans, these weren’t originally made to reduce loans; they were meant as a way for people to tap into their home’s equity. So unless you have a home with a stable value, this may not be idea.
Playing it safe
Choice offers one golden rule to borrowers, struggling or not: keep it simple. The more involved the rules are, the more likely it is to have technicalities where the banks can take advantage of you. And more often than not, “potential savings” on elaborate schemes are really nothing more than potential. Unless you’re well versed in the language of fine print, and have the patience for it, go for the simplest solution on offer.Back to top