According to Australian Bureau of Statistics, the majority of Australian household debt is in property loans. Factors such as the record housing prices, a period of low interest rates and relaxed lending standards for home loans are the major drivers. It becoming more challenging as the income is not increasing at the same rate.
Due to the historic record low cash rates, the lenders have kept the interest rate low. It’s been a blessing for those who aspire to own their own home. However, the interest rates are expected to rise. It means many may start to feel the pinch of mortgage stress.
However, there are ways to control your household debt and minimise financial stress in the future. The key is to identify the good debts and the bad debts.
Good debt – allows you to invest in assets that could increase your wealth. Loans to purchase shares, student loans for education that increases your income-earning potential and home loans.
Bad debt – is incurred to purchase items that decline in value or do not contribute to your wealth. This may include credit cards and personal loans for holidays or a motor vehicle that declines in value the moment it driven off.
Regardless of the type, debt carries a level of risk. Losing your job, excess borrowing, interest rate hikes may bring financial stress.
Here are some tips that may help you to get your household debt under control:
- Create a budget: Figuring out the money you have coming in and going out each week is the first step in understanding debt.
- Categorise debts: Classify all of your debt as either good or bad debts based on their potential to increase or decrease your wealth.
- Prioritise debts: Helps to keep you on track if you have multiple debts. You can try and reduce the level of bad debt by taking into account the nature of your other loans including applicable interest rates and relevant fees.
- Refinance and Consolidate debts: Find out the interest rates that your debts have and try to refinance it lower if possible. Sometimes debt consolidation may also make sense to roll all your debts into one facility. This may make them more manageable and can potentially reduce the number of fees.
Note: *The above information provided is general in nature. It is not to be relied upon as personal financial advice. As it has not considered your personal circumstances, needs or objectives.