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Low interest rates fail to curb mortgage defaults

Low interest rates fail to curb mortgage defaults

Borrowers are increasingly defaulting on their home loan repayments despite the low official cash rates, research shows.

Global ratings agency, Moody’s, found that while the national 30-day delinquency rate remained steady at 1.8 percent in the 12 months to May 2012, sharp spikes in defaults occurred in localised areas of Australia including south-western Sydney and the Gold Coast.

John Tancevski, chief executive officer of Community First Credit Union, said one of the big causes for the jump in delinquency rates has been the failure by the big banks to pass on interest rate cuts in full.

“In tandem with increasing living costs and correcting house prices in some areas, the big banks’ decision not to pass on the full rate cuts has left many Australian households struggling to make ends meet,” he said.

Tancevski said the current low interest rate environment is a double-edged sword.

“For borrowers, paying off a mortgage is usually less stressful when rates are low; however, the improved affordability also creates complacency, and some people easily over-extend themselves in the good times by applying for a much larger loan. This potentially puts them at risk of mortgage default.”

Buying a home is the biggest financial commitment that many of us make in our lives and before purchasing, Tancevski recommends that borrowers assess their own financial situation.

“You need to seriously ask yourself if you can afford the loan.”

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Increase your chance of approval

When applying for a home loan, a strong credit history with complete employment and financial documentation is essential, according to Tancevski.

“Since the GFC, lenders are no longer making it simple to get easy credit. At Community First Credit Union, we make sure you can afford the loan before we approve it,” he said.

“Furthermore, lenders don’t look favourably on borrowers with unrealistic borrowing expectations. It is important to live within your means and not to over extend yourself.”

However, even in the event of best laid plans, sometimes homeowners find themselves struggling to meet their repayments, according to Michelle Hutchison, spokeswoman for RateCity.

“An illness or job loss can create a speed bump that impacts your ability to make mortgage repayments. When these events happen, you need to act quickly,” she said.

“Contact your lender as soon as you begin to struggle to make your repayments or sooner if you know you will be hit with hardship in the near future. Most lenders will work with you to ensure your repayments get back on track.”

If you’ve got at least 20 percent equity in your home then one option is to refinance your home loan into a lower-rate option to save on interest costs, she said.

“If your mortgage is hurting you, consider taking your business elsewhere. One simple way to get started is to use a comparison website such as RateCity.com.au, which has over 2000 different home loans for you to pick and choose from.”

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