The Good, The Bad & The Ugly

8 August 2014

One of the biggest impacts we have seen of Generation Y’s want it all and want it now mindset is in the level of short term debt that is accrued in order to provide a comfortable lifestyle. But don’t think that this is a habit that is owned only by the under 40’s. For many years, retail outlets have been providing hire purchase or term payment options enabling people to take possession of the product before owning it, with payments being made over a period of time.

While this may help us to achieve a certain standard of living without sacrifice of immediate saved funds, it is important to be aware of what implications this may have if you are planning the purchase of your own home or want to obtain additional funds to make home improvements. We have on several occasions seen clients who have been unable to obtain home loan borrowing due to the level of debt that they have in place. So why should this make a difference and how can it be avoided?

Short term debt such as Personal bank loans, Hire Purchase, Store and Credit Cards and car loans are generally set up over shorter repayment terms due to the higher risk attached because of the nature of the products being purchased. Often the interest rates are much higher as well, meaning that the size of the loan repayment is inflated. When home loan affordability is being calculated by lenders, any payments that are being made on short term debts will reduce the surplus of funds available to meet the new loan payments and as many banks are using calculators requiring a larger surplus, any of these existing debts may well compromise your plans of home ownership.

The other implication of high interest, short term debt is that any funds that may have been otherwise put towards savings are being used on repaying the existing debt. This lack of savings will restrict the number of lenders that can be approached as well as limiting the types of products available. So, how do you increase your chances of obtaining a loan approval to take advantage of the current quiet market conditions?

The answer is all in the planning. If you are serious about purchasing your own home then you need to work on reducing your debt levels. Some lenders are now saying that they are able to offer loan approvals to those with less than 20% deposits as long as there is sufficient surplus after all expenses have been taken into account, but it is unlikely that you will be successful if you are spending a significant amount of your income on repaying short term debt. In fact, even if you have a good deposit, the level of debt may still compromise any application by taking away available funds towards loan repayments or reducing your surplus to below the level required for the size of loan that you may require.

The other impact of taking on too much short term debt is the effect it may have on your Credit rating. While you would expect that the fact that multiple companies have been happy to provide funds to you over the years, it may be seen by home loan providers that your reliability on using other people’s money is an indication that your money management and debt reduction abilities may not be as good as they would desire from a prospective borrower.

There are many online tools available to work out your loan affordability but the best plan if you are considering getting into owning your own home or purchasing a larger property, is to contact your local registered home loan adviser to discuss how to best approach your loan application and if necessary, reduce your debt to a cost-effective workable level so that you will still be able to reach your goals.

 

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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