Spiralling living costs and rising interest rates have prompted a growing number of Aussies to roll their personal debts into their home loans in what could be a risk for the economy.
New Finder.com.au research has estimated that more than a million Aussies have rolled car loans, credit card debts and other loans into single debts over the past year as a way to reduce their repayments.
Another 10 per cent of the Aussies surveyed in the research were considering consolidating their debt sometime soon, largely to help deal with the rising cost of living.
Mortgage experts explained the most popular strategy was to roll debts into a mortgage, which offered cheaper interest rates, but spread over a much longer time period.
Analysts explained that these moves have come at a risky time for homeowners given that property prices in many areas are now falling and threaten to continue falling over the rest of the year.
The housing market has been slowing, with prices now falling in many areas.
The danger is that some households will have increased the size of their mortgage debts just as the value of their properties drops, leading marginal borrowers to slip into negative equity.
Negative equity is a situation where the homeowner’s mortgage is worth more than the property itself and they would owe the bank extra money if forced to sell at a price lower than the debt.
MORE: ‘Nothing like it’: Sydney’s record new $150m home
PropTrack figures showed property prices have fallen by over 20 per cent in some areas over the past three months, the minimum amount of equity lenders typically demand for debt consolidation requests.
Some of the biggest falls were recorded in Sydney, with apartment values in suburbs such as Pyrmont and Kirribilli now about 26-27 per cent lower than they were a year ago.
Westpac forecasts released in May revealed Sydney and Melbourne would have a downturn in prices this year.
Property market sentiment had been weakening in the lead up to Treasurer Jim Chalmers’ Budget release in May. Picture: Hilary Wardhaugh
Finder revealed that credit card spending was a big driver of rising household debt – and likely behind some of the push for households to get personal debts consolidated into their mortgage.
Credit card spending jumped 6.1 per cent over the past year and total credit card balances climbed to $44.2 billion in February, a figure 5 per cent higher than a year ago, Finder noted.
Shoppers made a staggering 330 million transactions in February, averaging $3,253 per card.
Much of this rising credit card debt was not getting paid off, exposing the cardholders to much higher interest rates and repayments.
Those who consolidated these debts into their mortgages would typically get short-term reprieve in the form of cheaper interest charges, but would incur higher long-term charges.
Finder personal finance expert Sarah Megginson said credit card debt was putting households under pressure to made major adjustments.
“Credit card debt has become an ongoing financial strain that borrowers are struggling to manage in today’s economic environment,” she said.
Consolidating debt has long been a popular strategy for homeowners, but the timing of such moves could be tricky.
“Aussies put 11.8 million purchases a day on credit cards in February – and without a clear repayment plan, those everyday expenses can quickly snowball into long-term debt that’s much harder to escape.”
Comedian Dave Hughes recently spoke to some of the fears many homeowners have about negative equity in a climate where recent government tax changes threaten to pull down home values.
Commenting in a video posted to social media, Mr Hughes explained that negative gearing and capital gains tax changes could pull down prices and leave recent home buyers in trouble.
He described a hypothetical situation where someone would have bought a house for $2m and spent an additional $100,000 on the stamp duty, only to realise the value could fall due to the reforms.
“So you’re up $2.1m and you voted for Labor because (Albanese) said he wasn’t going to change anything. But he lied and he changed everything. And the property market crashes, goes down 20 per cent.
Rolling a car loan into a mortgage will reduce the monthly repayments but will increase the lifetime cost of the loan.
“Now all you can get for the house is $1.6m … but then you lose your job and you have to sell it. And so you’ve lost $500,000. You’ve just lost your lifesavings.”
Two Red Shoes mortgage broker Brett Sutton said borrowers needed to go in with their “eyes open” if considering consolidating debt into their home loan.
“Rolling personal debts like car loans and credit cards into a home loan carries real risk right now,” he said.
Mr Sutton added that the cash a borrower would free up from this move needed to be measured against the long-term cost.
“That cash flow relief today is materially worth something and shouldn’t be dismissed … (but) when you consolidate unsecured debt into your mortgage, you’re securing it against your home.
Personal finance expert Sarah Megginson said debt consolidation could be a prudent strategy for those who were disciplined, but it was also risky. Picture: Michelle Swan
“If values fall significantly – and a 20 per cent drop in some markets is a real possibility being discussed – you lose equity on two fronts: the market moves against you, and you’ve already drawn against that equity to cover debts tied to assets that won’t hold their value.
“A car rolled into your mortgage today won’t be worth what you borrowed against it in five years, but the debt secured against your home will still be there.
“There’s also a long-term cost trap that catches people off guard. A car loan or credit card at a higher rate over three to five years can actually cost less in total interest than rolling that same debt into a mortgage at a lower rate over 25 to 30 years.
“The monthly repayment looks better, but the total cost often isn’t. That equation only works in the borrower’s favour if they’re genuinely committed to making additional repayments – and that discipline is hard to maintain once the immediate pressure is gone.
Comedian Dave Hughes slammed Labor’s changes to CGT and negative gearing.
“With rates still likely to rise further, borrowers also need to stress-test what that consolidated debt looks like at a higher rate over a longer horizon – not just what it costs them this month.”
Ms Megginson said the benefits of consolidating debt needed to be measured against the risk: “If property prices fall, homeowners could see their equity shrink faster and if they don’t make extra repayments each month, they could end up paying off short-term debts over decades.”
English (US) · 