Smart debt vs bad debt
Gillian Bullock
October 2005The incidence of people borrowing against the equity in their home may have increased in recent times, but surveys undertaken by both the Reserve Bank and Infochoice appear to indicate that the money drawn down is mostly not squandered on consumables. Gillian Bullock reports.
While $20 billion has been withdrawn from the equity in home loans in the last year, less than one-third ($6 billion) has been spent on consumables such as holidays, cars and redecoration, according to the Reserve Bank survey of 4500 households.
Indeed, 58 percent of the funds withdrawn were used mainly for asset accumulation, with a further eight percent used to pay down other debt.
The earlier Infochoice survey found that 20 percent of homeowners had borrowed against their home for shares or other investments (but not property) in 2005 compared with just 12 percent in a similar survey in 2004.
The Reserve Bank conducted its survey in a bid to uncover why household spending was continuing to increase at a time when household income was not growing.
The survey found that 11.7 percent of households — that’s almost one in eight — made a net withdrawal of equity during 2004 and that the bulk of the funds were used for purposes other than current consumption.
This is good news given the dangers of converting short-term debt such as a holiday debt into long-term debt over the life of your mortgage.
Infochoice general manager Denis Orrock warns such a strategy means you will pay large sums of interest on your consumer purchases.
Eric Hiam of Balance Financial Solutions says: “It’s unwise to borrow without gaining an asset unless you are exchanging a dearer debt for a cheaper debt. If not, you are on the road to insolvency.”
Lisa Montgomery, national manager consumer advocacy at Resi Home Loans, attributes this trend to wise use of equity largely to greater financial literacy among Australians.
“There has been a lot of advice on the use of equity for smart debt rather than dumb debt,” she says. “When you buy consumer goods which depreciate then they will fail to give you any value.”
However, Montgomery warns that Australians are still spending heavily on consumer items but using their credit card rather than the equity in their home.
“We are still spending at the rate of knots on our credit cards and that is a matter of concern,” says Montgomery.
Reserve Bank figures bear this out, showing that $15.3 billion was spent on credit cards in August.
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
