RBA rings alarm on high debt levels
Risks to financial stability could be building as house prices and debt levels keep rising, the Reserve Bank has caution...
Consumer debt could restrict investors’ borrowing capacity by four times the credit limit, according to Smart Property Adviser’s Kevin Lee.
Credit card, personal loans and loans to take a holiday or buy a car are all classified as consumer debts.
These debts, when not paid off 'religiously', can restrict investors’ capacity to borrow, which is a particular problem for first time homebuyers who are unaware, Mr Lee told Smart Property Investment.
Investors find out “the hard way, when they get declined or they find out they can’t borrow as much as they need to buy a property,” he said.
Although not publicised by the banks, Mr Lee said he does his own calculations, and “every time it comes out around four times that limit.”
He pointed to credit cards as one consumer debt that investors should be wary about.
If a couple have a combined credit card limit of $25,000 and the credit debt is not paid off on time or in full, $100,000 will come off their ability to borrow for a property, Mr Lee explained.
They may have had “the ability to borrow $400,000 to buy a property, [but] that’s reduced to $300,000 because of those credit card limits.”
Mr Lee warned that investors should be particularly cautious about purchasing items "interest free" as they may be penalised with high interest rates if they do not pay on time.
“Things that are supposedly interest free, come with some horrendous backlashes if you don’t follow the rules,” he said.
Investors, therefore, should go for the lowest limit possible, Mr Lee advised.
“If you don’t pay it off in full every month, it will kill you financially. There are no ‘ifs’ or ‘buts’ about that.”