Bad Credit Mortgages – what you should know

While having some bad credit history will not stop you from qualifying for a bad credit mortgage, there are distinct differences between the loans offered by mainstream lenders and bad credit mortgages.

No deposit means no loan

This is non-negotiable even with a clean credit application. In today’s mortgage environment all lenders will want to see some evidence of your ability to save on your income. One such evidence source is having a good home loan deposit. While squeaky clean borrowers may be able to get away with only a 5% deposit, anyone with a history of bad credit needs to have at least 20% and in some cases more. If ll you have is a couple of thousand in savings – a bad credit mortgage ill not be possible. After all there are costs involved in purchasing a property well beyond the need for a deposit. With home prices where they are many buyers need at least $15,000 to simply cover the costs of stamp duty. Then there is legals etc.

Undischarged bad credit  will result in application decline

When we talk about a bad credit mortgage – we refer to a loan offered to someone who used to have unpaid defaults, bankruptcy, judgements or a debt agreement in their past. However to qualify for a bad credit mortgage these really do need to be part of your past rather than your present. At the very least the borrower needs to demonstrate that with the money borrowed with the bad credit mortgage they will be able to pay out their bad debt and still remain under 80% loan to value ratio with their new mortgage. This can be very difficult, unless you have owned your property for many years and your current mortgage sits at 50%-60% only.

Rates will be higher – so your income needs to be higher

The worse is the borrower’s credit history, the higher risk their loan application presents to the lender and the more expensive their mortgage is likely to be. While you may not mind paying a little more for your home loan, you will need to be able to demonstrate to the lender that you can afford the mortgage, given the higher cost of interest, on your current income. Lenders will test mortgage affordability assuming rates increase by a further 2% and a repayment of principal and interest in the long run. On this basis qualifying for a more expensive mortgage is rather difficult unless you need to borrow a small amount only.

Try specialist lenders if your bank said “No”

Few mainstream lenders will want to deal with a bad credit applicant. If your lender of choice said “no” that does not mean that a specialist bad credit lender will do the same. It is worthwhile to seek out the assistance of a bad credit specialist to source the best lender for your circumstances.

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New Year resolutions that should be on your list

It is 2016 already! When you are a child or even a teenager, it is difficult to understand when you hear such expressions from adults as “Life is short” or “Time just flies”. I remember thinking what are they saying? The year simply drags when you are in school and you need to wait forever for your next birthday or a family holiday. Unfortunately time stops dragging its feet as soon as you get married and have children. You find yourself so busy that you do not even notice the years slip away until you wake up one morning, you are 50 or 60 and where has the time gone? It is for this reason that you do not want to give up those goals and dreams that the younger you had.

Good health and fun family holidays are very important and most of us will put these on our list of dreams and aspirations. We all want to have more holidays, live a longer and a healthier life, live in comfort and enjoy fun times with friends. We also want to enjoy our work/business and have financial independence or at the very least financial stability.

These last 2 goals rarely make it on to anyone’s list of New Year resolutions because they are complex and need significant effort to implement.

However nothing worth having comes easily. It is for this reason that we have compiled a number of New Year resolutions that should be on everyone’s list. It is the implementation of these resolutions that can free us up to enjoy our life and dedicate more time to our health, family and friends. It is difficult to live your dream if you do not have your financial house in order.

Stop living on credit

This can only become possible by budgeting to ensure that you only live within your means and stop living on credit through increasing credit card balances or your mortgage.

Pay off your Credit Card Debt

Credit card debt can keep you poor. It should be a priority for each and every Australian to ensure that their credit card balances sit at $0 by the end of 2016.

Invest for your future

Once you pay down your credit cards to zero you can concentrate on investing for your future. Your superannuation is only part of the answer. To achieve financial independence sooner you need to investigate investment in property, shares, managed funds or even a business. Those who do not invest for their future tend to retire on a pension and never live to see many of their dreams and aspirations realised. Remember that financial independence is about more than just money, it is also about peace of mind. If you do not have financial worries you can concentrate on maintaining a healthy weight, or good health. These are harder to achieve when you are always stressed and worried about paying bills.

Teach your children financial responsibility

It is up to you to teach your children financial responsibility. Everything else around them is designed to tempt them into financial irresponsibility. We are all exposed to “Buy now pay later”. It is up to all of us to teach the next generation when credit is appropriate and when it is best avoided. In doing so we can relax knowing that one new year resolution common to us all – the welfare of our children, is under control.

 

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Give your children the gift of Financial Literacy this Christmas

I am not passing any value judgement on the social importance to most Australians of the Christmas holiday, nor on the religious significance of Christmas, rather on what many take as their ‘god-given right’ to spend up big during Christmas whether they can afford to do so or not.

True, Christmas is about giving, however you are not expected to give on credit. It is possible to gift those close to you, your time, attention and care without racking up unaffordable credit card bills that come back to bite you in the new year.

Responsible spending should be taught from a young age

It is well researched by psychologists that children learn financial behaviour from their parents. What can children learn from a parent that is struggling with overloaded credit cards at the start of each new calendar year?

It is important to lead by example and teach children that you do not have access to unlimited money. You need to budget to work out what money, if any may be available to spend on Christmas. It is similarly important to explain and show that you can have a holiday celebration without spending a lot of money.

Set a Christmas budget and stick to it

Get the whole family involved in planning Christmas but do so firstly by establishing a holiday expenditure budget. This does not mean how much credit limit you have available on your credit cards, rather how much money you are able to put aside towards Christmas shopping after covering all essentials and without increasing your credit card debt.

You do not need to spend a lot to enjoy Christmas

Some people will not be able to afford Christmas presents  of $50 or $100 per person and that needs to be considered right upfront rather than at the end of the holiday when unaffordable card statements start rolling in.

If all you can afford is $10o to be spent on all the Christmas presents, then you must demonstrate financial responsibility to your children and find creative ways to spend this money for maximum impact. Parents who wish to give their children as much as they can whether they are able to afford this on not are not doing them any favours.

If you can not afford presents, then what is wrong with home-made gifts?

The child learns early that as long as there is space available on a credit card, they can go shopping. That message creates young people who are unable to manage their finances and get into financial trouble early in life.

 

Give your children the gift of financial literacy this Christmas, and they will never look back.

 

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To fix or not to fix – that is the question !

Home buyers are very confused, and who could blame them? While the RBA seems to stick with a strategy to keep interest rates low in order to  help the Australian economy find its feet, the banks have commenced rate increases of their own. These increases are no longer aimed at discouraging excessive speculation in the Australian residential property by investors. The most recent spate of rate increases have been applied across the board to all mortgage holders.

So what lies ahead? Is it best to fix your mortgage or take a chance that rates will fall further? This is the $64 million dollar question. Anyone who claims to know what sure what will happen next is lying. However even when the national economic future is uncertain, the specific situation of a borrower is likely to be more certain.

Fixing is a good idea if

Borrowers whose budget is very tight, and who will struggle if rates increase should give fixing a serious consideration. This will ensure that for a number of years at least you can stay with pretty much the same repayments as you have now, or possibly even lower where the fixed rates are below the variable. Knowing that you will be able to afford your mortgage for the next 3-5 years is worth a lot for a family on a low income and a tight budget. This remains true as long as you do not intend to sell your home during the fixed period for any reason at all.

Fixing is a bad idea if

Fixing your mortgage is not a good idea if you are planning to move for work or personal reasons during the fixed period. If you take a portable mortgage you may be able to simply substitute securities when you move and buy another home in another area. However there are a number of restrictions with this and if you will not be able to find a replacement property to purchase in the specified period you may incur significant break-up fees.

It is also a bad idea if you are anticipating a large windfall over the proposed fixed period and would like to apply that windfall to your mortgage. Most fixed mortgages will not allow principal repayment during the fixed period.

Consider a partial fix

A partial mortgage fix offers borrowers the best of both worlds. You can fix some part of your mortgage, leaving another part as variable. Then in the event of an unforeseen sale of the home during the fixed contract, the break up fees will be smaller as they are charged proportionally to the amount of your fixed loans. Likewise if you come into some money and would like to pay down some of the loan principal, the variable mortgage part can be paid down without incurring any penalties.

 

 

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Credit repair is not what it seems to be

Given the intense regulation of all financial product marketing in Australia I continue to be surprised at what “is allowed” when it comes to promoting credit repair services. Advertisements promise to wash away your bad credit, creating the impression that all you need is to take up the offered service and your bad credit will be history. Unfortunately that is completely untrue. While some bad credit history can be removed with little trouble, majority of bad credit events will need to stay on your credit report for many years to come.

What bad credit can be removed?

The only bad credit events that can be removed from your credit reports are those that were placed in error or where not removed in error, or where the credit provider did not follow protocol in registering bad credit on your report.

For example a default that does not belong to you for a service that you never signed up for, could possibly be removed. However if you acted as  guarantor on someone’s credit contract and they failed to maintain repayments, then you are still liable and could be held responsible for their bad debt. If the original borrower fails to repay their debt and the guarantor does not step in to continue repayments – the guarantor’s credit history can be adversely affected.

In some circumstances where the credit provider did not follow the appropriate protocol in advising you of the unpaid debt before placing the debt on your credit report, it may be possible to have the debt removed and the credit history repaired.

What bad credit will need to stay?

Bad credit that was correctly placed on your credit report because despite all the appropriate notices being provided, the debt remained unpaid – can not be removed. That means that someone with an unpaid default or a paid judgement/part 9 is unable to simply make a payment and have their credit report washed clean.

How much will this service cost?

There can be quite a difference between the cost of credit repair service depending on the service provider you decide to use and their method of charging for their services.  Some companies like to charge upfront based on the amount of bad credit you need to have removed, whereas others will be happy with some monies paid upfront and some at the end.

Can you do this yourself?

You absolutely can try to repair your own credit report yourself especially where you have already identified errors and have proof of the said errors to provide to the entity that is claiming non-payment. In fact the more credit repair you are able to complete by yourself the more money you will save. If you have trouble dealing with some of the debt that you feel should have never been listed on your credit report – then by all means try one of the credit repair professionals. Do remember that they may be able to help but they are not miracle workers and some debts will need to remain.

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Best mortgage reduction strategies

In the current economic environment just about the best financial strategy for anyone would be to try and pay down their mortgage as soon as possible. Once rates start going up this will be far harder to achieve than today.

However not everyone is in a good financial position. It may be that you are experiencing financial stress despite the current low interest rate climate. If you are, you need to speak to your lender ASAP to reach a deal that is affordable to you and prevent you from falling into arrears with repayments.

Pay off more

If you can afford to pay off more – you should. It does not matter what your set repayment are, try to reduce your mortgage with extra principal repayments whenever you can.

Refinance to a cheaper lender

It is important to always look out for what are the current best mortgage deals available. By refinancing your loan every couple of years you may be able to save thousands of dollars and years off your mortgage. The Australian mortgage market is very volatile with new offers out every week. What was best a year or two ago is almost certainly not so today.

Take in a boarder

Taking in a boarder can assist you with reducing your mortgage sooner by the extra rent payments that you are collecting. It is best to apply these to the mortgage rather than lifestyle expenses.

Rent out your home

Some people do really well by furnishing and renting out their home for a year or two on an executive lease while they move to smaller and more modest accommodation. If your home is not quite suitable for this, then a regular lease may also be financially viable.The extra money can be applied to mortgage reduction. It is amazing how far a few extra thousand dollars a year can go when they are applied directly to the loan principle.

Sell some assets 

We all have something that we no longer use, gathering dust in the garage. Try to sell whatever you no longer use and apply the proceeds to your mortgage.

A more modest lifestyle yields rewards

It is not easy to go without the day to day luxuries you may be accustomed to. Your morning latte, the weekend outing and the summer holiday are all eating into the family disposable income. The more that you are able to save the better. Those of us who are not using the current low interest rate climate to reduce their mortgage principal will find that a more modest lifestyle is no longer a choice, but a necessity once interest rates start increasing.

 

 

 

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Paying too much for your credit cards?

If you think that the credit card companies are charging outrageous interest rates on your outstanding credit card debt, you are not alone.

A recent  Senate inquiry into credit cards  has confirmed what most of us already knew – that providers are exploiting consumer disinterest  to keep interest rates significantly higher than they need to be.

This damning assessment, was made public as the bank lobby group was exposed for telling the same hearing only half the story about interest charges. Unlike the interest rates levied on other consumer credit products such as mortgages, credit card providers continue to increase the rates they charge credit card users despite the fact that our cash rate has fallen to unprecedented lows.

So how much credit card interest should you pay?

The truth is that you should be paying $0 interest on your credit cards irrespective of what interest rate is levied by the card provider. Credit cards should never be used as an extended credit facility. If you are unable to repay a credit card balance in full at the end of the interest free period, it is best to move that balance to a cheaper debt facility such as a personal loan or a mortgage.

Using Credit Cards to Eliminate Credit Card Debt

Those in the know have been using credit cards to eliminate credit card debt for a long time. Credit Card providers have been making 0% balance transfer credit cards available to consumers for a number of years, which can actually be your best friend when it comes to eliminating expensive credit card debt. You can apply and transfer credit card debt from expensive credit cards to a card that costs you nothing at all for a period of several months. During that time you need to apply all spare income to pay down the rolled over debt. At the end of the 0% period, the strategy is to simply roll over the debt balance to the next 0% interest credit card and continue to do so until all your card debt is repaid in full.

The traps with 0% credit cards

There are a couple of traps at least with zero interest balance transfer cards that you should be aware of:

(i) do not make any new purchases on the card that you have taken in order to roll over existing debt. Doing so will make repaying the outstanding debt more difficult as new purchases can attract a high interest rate from day one. Simply use the new card fro debt reduction only;

(ii) keep track of the dates to ensure that you do not incur any interest on the balance transfer card. A few days before the 0% period is scheduled to expire, roll the debt over to a different 0% balance transfer card. This way you will be able to continue to reduce your credit card balance without paying hefty interest rate charges.

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Getting your financial house in order

While smart financial management is something most of us aspire to, in our experience few people actually get there. First of all, analyzing ones financial situation and charting out a wise financial course is not terribly exciting as well as time consuming. Therefore as with other non-essential decisions to our day-to-day existence, they are often put on the back burner. Something I will get to eventually but not just yet.

We are faced with too many temptations along the way. Holidays, cars, furniture, a better home, nicer clothes, a pool, a boat and so on. After all if you are working hard it seems only fair that you afford yourself little luxuries along the way.

The problem with this mindset is that while you enjoy your life today nothing gets achieved in terms of securing your financial future. If you do not know where exactly you are going how are you going to get there.

Eliminate lifestyle debt

No matter what you are looking to achieve financially, lifestyle debt can be a barrier. Therefore for almost everyone the first step in getting your financial house into order is eliminating lifestyle debts such as credit card balances, personal loans and payday loans. You have taken these one at one time or another because you were living beyond your means and this is something that needs to stop if you wish to get ahead financially.

Live within your means

To ensure that you do not spend more than you earn it is best to document a budget that takes into account all your fixed and variable costs of living. Once you do this you will quickly see if you are managing to save some money every month or you are actually moving more and more into the “red”. Living within your means may be challenging for someone who has always borrowed from tomorrow to pay for today. However if you do not decide to make some changes today, tomorrow may be a very sad place.

Pay your bills on time always

Having a clean credit history has always been important. Some people may think that being a day or two late with your bill payments is not a big deal. They are of course correct until they try applying for any form of finance, where their tardy payment history may result in a higher risk being attributed to them as borrowers and their borrowing costs being higher than those of a clean credit applicant. Being disciplined and paying all bills on time is critical to anyone who wishes to take control over their financial future.

Identify future financial goals

What would you like to see in your financial future? Do you wish to achieve financial independence? Perhaps you want to own your own home outright sooner or buy a business. How do you wish to achieve these goals? One needs to have a documented strategy with realistic timelines if one is to achieve their future financial goals. If all you ever do about your goals is talk about them, then they are unlikely to progress to reality.

Few people get to where they want to go financially because they do not wish to place restrictions on their spending today for a better financial future tomorrow. However those who are disciplined can achieve far more than they realize.

 

 

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Do’s and Don’ts of borrowing

Unfortunately not having an adequate understanding of the Australian credit system and the basic mistakes that can easily be made by the unwary, has led many individuals down the path of excessive, unaffordable debts, and impaired credit history.

This information is not really taught in schools. Those of us whole parents are good financial managers will probably be taught the finance basics at home. However for many the truth becomes apparent simply too late.

Do borrow only for growth assets

Growth assets are property, business, shares and other forms of investment.

When you borrow to purchase a growth asset, the cost of the loan is tax deductible, however that is not your only benefit. Over an extended period of time your loans should yield both income and capital appreciation. Naturally not all property, businesses or shares are a good investment. If you are risk averse concentrate on the tried and proven. Do not buy speculative shares or invest significant funds into a business with no proven track record.

These loans can help the borrower accumulated wealth over time.

Do apply all available income to pay down your home loan ASAP

While interest rates are at very low levels, make sure that you apply as much of your disposable income as possible towards reducing loan principal. It can be very tempting to pay interest only and spend up big on personal purchases. This would be a mistake. Rates will not remain low for ever. The more you pay down today, the less you will be impacted when rates start climbing.

Do pay all bills on time – VERY IMPORTANT

This is probably the most significant DO. Each and every one of us needs to have a fool-proof system to ensure that all bills received are paid before they go into arrears. One day late is too late. A pattern of no paying on time will be captured on your credit report and cost you dearly when you next look to borrow.

Do not put any purchase on a credit card unless you can pay it off in full within a month

Credit cards should only ever be used instead of cash that you have in the bank. At worst you can purchase in view of money you are expecting to hit your account within a month. If you do not have cash in the bank when you are committing to a purchase on credit card and you do not expect to have this money in a matter of a few weeks,  put your card back into the wallet and walk away.

Credit cards are not personal loans. They are not meant to ever be used for lifestyle purchases that you are unable to afford.

Do not borrow to go on holiday or to arrange a wedding

Holidays, weddings, trips of a lifetime, the latest electronics or designer shoes should not be bought on extended credit This comes back to not wanting to pay interest on lifestyle purchases. Otherwise you are borrowing from your tomorrow to enjoy today, leaving you with a very bleak financial future.

Do not borrow with the sole intention to save tax

It is great to make tax deductible purchases. However never borrow for these with the sole intention of a tax deduction. If you do not expect to gain financially out of the purchase, with the exception of a tax deduction, you are most likely making a mistake.

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Credit options after bankruptcy

We often speak to individuals who have recently been discharged from bankruptcy and who are looking to borrow some money either in the way of an unsecured personal loan, a car loan or a home loan. Unfortunately your bad credit stays with you even beyond bankruptcy discharge and will affect your ability to borrow for up to 7 years beyond going bankrupt. So what are your credit options after bankruptcy?

Unsecured personal loan

Unsecured personal loans are simply not available to individuals recently discharged from bankruptcy. It does not matter as to the loan purpose nor the level of income of the borrower. Some lenders may be prepared to offer bad credit borrowers small unsecured loans, however these can prove to be rather expensive and are best to be avoided until your credit history clears up.

Payday loans fall into this category. You should not consider such a loan unless you know exactly when and how you will be able to repay it in full.

Secured personal loan (eg car loan)

Secured personal loans may be available to you with the most common form of these is a secured car loan. There are still rules in terms of how long your must be out of bankruptcy, the stability of your income and place of residence as well as the age and value of the motor vehicle. Generally speaking such loans are only available to individuals who can demonstrate that their finance have significantly turned around since the bankruptcy and the vehicle being used for security is no older than 5 years old.

Do not expect to pay the lowest advertised interest rate as generally speaking only non-conforming lenders will consider offering finance to a discharged bankrupt and their loans are priced to be more expensive than clean credit loans.

A home loan

If you are looking for a mortgage then you will need to demonstrate that you have a sizable deposit – at least 20% as well as all the costs of purchase such as stamp duty etc. Furthermore the interest rates available to borrowers with a bad credit history are higher than the advertised rates. To find a lender to approve your application, it will probably need to be directed to funders that specialize in bad credit borrowers. These loans are priced on risk. This means that the larger is the borrower deposit and the higher the borrower income the better are his chances of a cheaper mortgage.

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