Is Household Debt Becoming An Issue?

Australians are more indebted to housing than ever before, new research by finder.com.au, one of Australia’s biggest comparison websites, reveals.

Analysis of Australian Prudential Regulatory Authority data by finder.com.au shows the proportion of owner-occupier housing debt per adult compared to credit card and personal loan debt is currently at an all-time high of 89.3 percent – up from 80.6 percent in 2004.

Bessie Hassan, Consumer Advocate at finder.com.au, says figures show the amount of housing debt per Australian adult has increased by a whopping 136% in 11 years.

“When looking at outstanding bank debt per Australian adult, the amount of owner-occupier housing debt has skyrocketed in the last 11 years of available data – from $20,802 in December 2004 to $49,165 in December 2015.”

She said this was mainly due to Australian house prices rapidly increasing during this period – almost doubling in some cities.

“These increasing prices have pushed up loan sizes, with the average national home loan size jumping from $189,300 in January 2004 to $372,400 this January, an increase of almost 100%. This has grown much faster than inflation, which would have increased an asset by only about 34% in the same period” she says.

“In addition, Australians are becoming more comfortable with housing debt than previous generations, as a result of skyrocketing property costs. Simply put, if you’re serious about entering the property market, this is the predicament you face.”

finder.com.au’s research also found housing debt had significantly outpaced credit debt.

“Credit card and personal loan debt – which includes revolving credit, credit card liabilities, leasing and other personal term loans – has remained relatively stable, rising 18 percent from $4,999 in December 2004 to $5,885 at the end of 2015,” Ms Hassan says.

The trend of housing debt swallowing a rising chunk of personal borrowings would continue as long as demand for Australia's housing market continues to grow, she says.

Ms Hassan warns Aussies to consider what a correction in the Australian housing market would mean for them.

“If there were falls in the housing market like some experts are predicting, it could have profound implications for mortgagee’s capacity to service their debt,” she says.

A decrease in how much you owe is viewed as the simplest way to cut down risk.

Here are some tips..

Make fortnightly or weekly payments:

You really can save tens of thousands of dollars in interest charges and reduce your loan term by making your payments weekly or fortnightly. If you make fortnightly payments, you end up making one additional payment per year which helps to decrease your balance, which reduces the amount of interest that can be charged to your loan account. By making additional repayments, you could cut down your loan term by an average six years. Try this calculator to determine the effect of extra repayments on your home loan.

Lump sum repayments:

Before deciding on a lender, consider features such as their ability to accept lump sum repayments.  These payments involve depositing a large amount of money into your home loan early on to reduce the amount you owe. A lump sum payment puts more money directly towards the principal of the loan, meaning the original level of debt is decreased, therefore minimising your interest charges. Lenders calculate interest on a daily basis, so you can start saving on your interest almost immediately after making a lump sum payment.

Offset accounts:

Offset accounts are also a great option for borrowers looking to repay their loan sooner. An offset account is like a regular transaction account but directly linked to your mortgage account. The amount which is in the offset account actively reduces, or ‘offsets’ the principal loan amount. For example, if you have a loan amount of $300,000 and have $10,000 available in your offset account, the interest is calculated on a balance of $290,000. You can use your offset account as a regular transaction account by making ATM and EFTPOS transactions or online via BPAY, all the while reducing the interest calculated on your loan.

Rounding up: small change counts

The vast majority of banks will allow you to nominate the amount you want to pay with each repayment you make. This means you don't have to pay just the minimum amount. Of course, if you don't want to stretch your budget too far you can simply round up the payment you make to the nearest $5 or $10. This makes it easier to remember and it counts as making an extra payment.  If you have a mortgage of $300,000 at 6.06% your monthly payment is $1810.24. Round this figure up to an even $1820 each month. It's only an additional $9.76 per month so it won't break your budget. Yet, you'll shave 6 months off the end of your mortgage term and save $6,293.33 in interest charges. Small change has a big impact. Imagine how much more you could save and how much faster you'd repay your mortgage if you could round up that number even higher.