February 2023 - Credit Connection

Money is a curious thing. It’s something that can bring us immense joy and security, but it can also cause us great anxiety and stress. For many of us, one of the most stressful aspects of money management is dealing with bills – those pesky pieces of paper (or, more likely, digital notifications) that seem to pile up endlessly, threatening to topple our financial stability at any moment.

But what if we could take back control of our bills? What if we could transform them from a source of anxiety into a tool for building wealth and security? In this article, we’ll explore some key strategies for mastering your bills and achieving financial freedom.

In the face of mounting bills, increasing mortgage repayments and unexpected expenses, it’s so easy to succumb to feelings of panic and despair. Questions swirl in our minds like a storm: How will I pay for my car insurance and mortgage? How can I afford my children’s hobbies and activities? However, before we allow ourselves to be swept away by the tide of our financial troubles, it’s important to take a deep breath and consider our options.

Luckily, there are plenty of options to get you out from behind on bills to out front on your financial freedom.

Taking Control of Your Bills: Strategies to Help You Pay Off Debt

When we find ourselves drowning in a sea of bills, it can be all too tempting to bury our heads in the sand and hope for the best. But the good news is that there are steps you can take to regain control of your finances. In this guide, we’ll walk you through the process of taking back control of your bills, including two popular debt reduction methods: the debt avalanche and the debt snowball.

Evaluate Your Situation

The first step to taking back control of your bills is to understand your financial situation. Take an inventory of all your debts and expenses, including the amount owed, the interest rate, and the minimum monthly payment. This will give you a clear picture of where you stand and help you determine which bills to focus on first.

Create a Budget

Once you know where your money is going, it’s time to create a budget. This will help you make sure you have enough money to cover your bills and other expenses each month. Start by listing all your income sources and then subtracting your expenses, including minimum debt payments. If you have more expenses than income, you’ll need to find ways to cut back or increase your income.

Prioritise Your Bills

With your budget in place, it’s time to prioritise your bills. Start by paying the minimum amount due on all your debts each month to avoid late fees and penalties. Then, focus on paying down the debts with the highest interest rates first. This will save you money in the long run and help you pay off your debts faster. After you have organised and identified, it might be time to compare the market. You might be paying more for your electricity than you need to, and using some online tools like Bill Hero by CHOICE might be what you need to ensure you’re not paying for things you don’t need.

Consider a Debt Reduction Strategy

If you’re struggling to make progress on your debts, it may be time to consider a debt reduction strategy. The two most popular methods are the debt avalanche and the debt snowball. With the debt avalanche, you focus on paying off the debt with the highest interest rate first, while with the debt snowball, you start with the smallest debt and work your way up. Both methods have their pros and cons, so choose the one that works best for you.

Stay Motivated

Taking back control of your bills is not easy, but it is possible. The key is to stay motivated and focused on your goals. Celebrate your small wins along the way and remember why you’re doing this. Whether it’s to be debt-free, save for a down payment on a house, or simply reduce your financial stress, keep your eye on the prize.

Monitoring Your Credit Score to Maintain Good Credit Health

A good credit score is an invaluable asset. It can be the difference between being approved or declined for a loan, credit card, or even a rental agreement. It’s your financial reputation, and it’s essential to protect it at all costs. Credit scores can also be a fickle thing. A few missed payments or a maxed-out credit card can send your credit score plummeting, potentially causing long-term damage to your financial future. This is why protecting your credit score should be a top priority when you find yourself struggling to pay your bills.

In Australia, a credit reporting body must give you access to your consumer credit report for free once every 3 months. You can monitor your credit score through a number of credit reporting agencies, such as Equifax, Experian, and Illion. These agencies gather information from credit providers and other sources to create a credit report for you, which includes details such as your credit accounts, payment history, and any defaults or bankruptcies.

By regularly monitoring your credit score, you can ensure that the information on your credit report is accurate and up-to-date. You can also identify any potential errors or fraudulent activity, such as someone opening a credit account in your name without your permission. Catching these issues early on can prevent any damage to your credit rating and save you from the hassle of disputing fraudulent activity.

Monitoring your credit score can also help you identify areas where you can improve your credit rating. For example, if you have a high level of credit card debt, you can work on paying it down and reducing your credit utilisation ratio, which is the amount of credit you’ve used compared to your credit limit. This can have a positive impact on your credit score and improve your creditworthiness in the eyes of lenders.

The Allure of Instant Gratification and the High Cost of Delayed Payment

As the saying goes, “there’s no such thing as a free lunch.” The same can be said for credit cards and buy-now-pay-later schemes. While they may seem like a quick fix to financial troubles, they can lead to a vicious cycle of debt that’s difficult to escape. As tempting as it may be to take advantage of the ease and convenience of buy-now-pay-later schemes, recent events have shown that they may not be as safe and secure as they seem.

In fact, two major Australian buy-now-pay-later companies have already gone bankrupt, leaving many consumers in a lurch.

One of the main reasons for these failures is the increasing regulatory scrutiny that these companies are facing. As more and more consumers turn to these schemes to purchase goods and services, regulators are taking a closer look at their business practices and the risks they pose to consumers.

One company, in particular, Latitude Pay has cited increasing regulatory checks as one of the reasons for its financial difficulties. The company, which offered a range of buy-now-pay-later options, struggled to keep up with the regulatory requirements and was eventually forced to declare bankruptcy.

But why are regulators so concerned about these types of schemes? One reason is the potential for consumers to get into debt. When consumers use buy-now-pay-later services, they are essentially borrowing money to pay for their purchases. While this may seem like a convenient way to spread out the cost of a purchase, it can also lead to overextending your finances.

Ultimately, it’s up to consumers to take control of their finances and make informed decisions about how they spend their money. By being aware of the potential risks of buy-now-pay-later schemes and taking steps to protect themselves, consumers can avoid falling into debt and maintain their financial stability.

Remember, there is no one-size-fits-all approach to paying off debt. You’ll need to find the strategy that works best for your unique situation. But with the tips and advice outlined in this article, you’ll be well on your way to a brighter financial future.

So take that first step. Make a plan, stick to it, and don’t be afraid to ask for help when you need it. With time, patience, and determination, you can take back control of your finances and enjoy the freedom that comes with being debt-free.

If you have any questions or need further guidance, don’t hesitate to reach out. Our team is always here to help you navigate the world of personal finance and achieve your financial goals.

Know that you are not alone, and being behind on bills is not the end of the world. Help is available, and you can do this.

As the clock struck midnight on the eve of Halloween 2021, a chill ran down the spine of Australian homebuyers.

It was no ordinary fright, but rather the realisation that the game had changed, and their dream of homeownership was slipping further out of reach.

Before October 31^st, banks had used a 2.5% serviceability buffer to assess home loan applications. But then, like a ghost in the night, the Australian Prudential Regulation Authority (APRA) appeared and announced that the buffer was being raised to a minimum of 3.0%.

Suddenly, borrowers were left scrambling to understand how this change would impact their ability to borrow or finance.

What exactly is a serviceability buffer and how does it impact borrowing power?

Picture this: you’ve been saving for years, carefully budgeting and dreaming of owning your dream home. You find the perfect property, and you’re ready to take out a mortgage to make your dream a reality. But just as you’re about to sign on the dotted line, you’re hit with the news: the serviceability buffers have increased, and you no longer qualify for the loan you need.

In the simplest of terms, a serviceability buffer is the difference between the interest rate on the loan and the borrower’s ability to service that loan, based on their income and expenses. It is a percentage that lenders add to their assessment rate to ensure that borrowers can still afford their loan repayments, even if interest rates increase.

These minimum financial requirements are designed to protect borrowers and lenders alike, ensuring that borrowers can afford their loan repayments and reducing the risk of loan defaults.

However, the impact of these buffers on borrowing capacity cannot be ignored.

As home loan serviceability buffers have increased, many potential homebuyers are finding themselves priced out of the property market. The higher buffers have effectively reduced how much money customers can borrow, making it harder to secure a mortgage.

APRA Maintains 3% Serviceability Buffer Amid Economic Uncertainty

As the world continues to grapple with economic uncertainty, the APRA has announced its decision to maintain the 3% serviceability buffer for home loans. Despite increasing pressure to ease lending standards, APRA has remained steadfast in its commitment to promoting stability at a systemic level.

In an information paper released on the 27^th of February 2023, the regulatory body confirmed its view that the existing policy settings remain appropriate based on the current risk outlook. With the potential for further interest rate rises, high inflation, and risks in the labour market, APRA Chair John Lonsdale emphasised the importance of maintaining a prudent approach to lending standards. As such, the serviceability buffer remains a critical tool in the regulator’s toolkit, providing a buffer in bank capital for stress if needed.

Refinancing and Mortgage Prisoners

The impact of this could be significant, particularly for those who are already struggling to get on the property ladder. It also affects those who may have previously been able to refinance their mortgage or access equity in their home.

Imagine being locked into a mortgage with no way out. You’re paying more in interest than you should be, and your repayments are putting a strain on your finances. You know that if you could just refinance to a better deal, you’d be able to breathe easier. But the serviceability buffers have other plans for you.

This is the reality for many homeowners in Australia who are now classified as “mortgage prisoners.” These borrowers are trapped in their existing mortgages, unable to refinance due to the increased serviceability requirements.

This is particularly true for those who took out fixed-interest rate loans several years ago, when rates were much lower. As these loans expire, many borrowers are looking to refinance. However, with the increased serviceability buffers, many of these borrowers no longer qualify for a new loan, effectively trapping them in their existing mortgage.

The impact of being a mortgage prisoner is significant. These borrowers are paying more in interest than they should be, and many are struggling to keep up with their repayments. With interest rates expected to continue rising, the situation is likely to get worse before it gets better.

What happens next?

Overall, while the decision to maintain the interest rate buffer will likely have an impact on the property market, the broader context of rising interest rates, higher inflation, and a potentially slowing economy mean that the impact on house prices is uncertain. However, APRA’s commitment to strong lending standards is an important step in ensuring the long-term stability of the Australian financial system.

If you’re one of the many homeowners in Australia who are feeling trapped by their mortgage, there is hope. Our Mortgage Action Plan offers a solution to the problem of being a mortgage prisoner.

Our team of experts will work with you to assess your situation and find a way out. We understand the intricacies of the serviceability buffers and can help you find a lender who is willing to work with your unique circumstances.

Our Mortgage Action Plan includes:

Comprehensive assessment: We’ll take a detailed look at your financial situation, including your income, expenses, and assets, to determine what kind of loan you can afford

Strategic planning: We’ll work with you to create a plan to pay off your mortgage as quickly as possible, while still allowing you to live comfortably.

Lender matching: We’ll find a lender who is willing to work with your unique situation, whether that means finding a lender who is willing to offer a lower interest rate, or finding a lender who is willing to work with your lower borrowing capacity.

Ongoing support: We’ll be there for you every step of the way, providing ongoing support and guidance as you navigate the process of refinancing your mortgage.

Remember, the serviceability buffer is not the end of the road for borrowers. With careful planning and strategic decision-making, it’s still possible to achieve your property ownership goals.