The truth behind soaring interest rates...


Some families are buying less food so they can pay increased home loans. This national tragedy affects everyone and
it may help to understand why this situation
has occurred.

Home loan interest rates soar. The headlines panic through the millions families paying of mortgages.
This panic affects everyone, even though the consequences of rising interest rates vary greatly. While higher
interest rates mean many borrowers more than they did when they initially took out their loan, hundreds of thousands
of home buyers are not affected at all.

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The hardest hit are the people whose current repayments no longer cover their interest bill. This is called short fall,
Which is added to the overall amount they owe, so instead of paying off their debt, their are sinking further into it.

If you were wondering how this happen, you need to look at the changes that happen in the system.

Home loans haven't always been this easy to obtain, But when the banks were deregulated last year the availability
of funds of home loans grew greater. With this came an increase in buyer demand. As home buyers battled soaring prices,
along came a hike in interest rates caused by the scarcity of money in the economy. Its a vicious cycle.
Leaders have to offer higher rates is past on to the borrowers.

Building societies have always operated in this free market, but they have the disadvantage of being more limited
in their operations than the banks.

Recently banks and building societies had to fight further competition for depositors money, because of an
increasing number of attractive investment options from institutions such as offices and trust management companies.

Also the amount of money available to banks and building societies is dictated by the state of the economy
and the Federal Government's tight money policy which restricts the amount of available money.

The government doesn't achieve this By lowering production at the Mint, it does so through the buying and
selling of the government securities.

They also said that the 20 per cent of the home loan mortgages are behind in their repayments.

People who took out their home loan when the banks deregulated and able to set their own interest rates,
are the most affected.

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Before then, Interest rate were sets around 13 per cent. The 800,000 or so home buyers who took out their loan
Consequently, Westpac has called on the government to allow banks to increased this 13.5 per cent, To even the burden.

There is one way to take advantage of the present situation: The current taxation system makes paying off a home
loan as quickly as possible one of the best investment the average person can make.

Its like investing that extra money at the home loan interest rate and getting the profit tax free. Some banks also let
you pay off your loan each week, which can save thousand of dollars interest.

If you cant afford to increase your regular repayments, you can make a single additional payment and you don't have to win
the lottery to take advantage of this opportunity.

Most pundit predict that the current crisis will be short-lived.

How much can i afford to repay?

Banks generally set a limit of between 30 to 40 per cent of gross income at which people can repay their housing loans.
Anything above that limit is considered to place too great a string on the family's economy.

Some might well have just been able to meet that criterion back when interest rate were 13.5 per cent, they find they
are falling behind.

The situation does vary of course. Many people will make almost super human sacrifices in pursuit of the Great Australian
dream of owning their own home.

Some couples in areas where the price of home ownership are greatest, Have postponed plans for a family indefinitely.
They hope that interest rates will fall and their financial burden will ease sufficiently to begin having children.

Predicting just when this leveling process will begin is obviously difficult, But most experts do not see it occurring
within the next 12 months.

How is my home loan affected?

Different banks and building societies have different repayment schemes, some of which cater to the current situation
better than others.

The Commonwealth Bank reappraises its home loans every three years. But it has taken the step of sending out letters to its approximately 300,000 home loan customers, advising them that interest rates maybe causing them to lose grounds in their battle to pay off their loan.

Westpac advises customers who fall in this category automatically. Computers identify who is at risk and they are contacted by their bank manager.

The ANZ's product is structured so that borrowers agree to annual increases of two and a half percent. This was designed to bring some equality to the burden repayments make on a family budget. The increase take into account the borrowers increase earning capacity.

At present however they also provide a safeguard against repayment falling behind the higher interest rates. In some cases it may suit the borrower to let this situation continue for a short term, in the hope that interest rates
will halt their spiral.

Those who took out their loan during the past 12 months or so may not be in a position to do this, because they may not been able to establish an equity. What a little equity has built up may be quickly eroded. Some lenders, have system of variables repayments which take into account changes in capacity to repay.

Learn more about Debt Consolidation

What can i do to ease the pain?

If you find yourself being swallowed by your home loan repayment, Or your position is becoming precarious,
The chances are that your lender already will have contacted you.

While they may not be unanimous over precisely what can be done to get interest rates down, they do agree
that it is in their best interest to keep your situation manageable.

This might mean extending the period over which home loan is repaid. In acute cases, Circumstances may have altered drastically since the loan has taken out. Illness may have struck, Cutting the household income, or they maybe a break up of a marriage or live in relationship.

In the case of incapacity, most lenders encourage barrower to take out insurance. In some cases, it becomes a requirement before the loan is made..

Some State governments offer Mortgage Relief Schemes, which take the form of short-term, interest-free loans that are paid directly into the home loan account. But these are really short term solutions. Demands for these reflect the conditions in each State.

The Queensland Housing Commission also helps custodial parents to retain the family home when a marriage has
broken down It offers a loan at 13.5 per cent to enable a custodial parent to buy out the former partner.

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It also has a policy which limits repayments to 25 percent of gross in come. This can reduce the limit to eight percent. The difference in no recouped subsidy from the commission.

But quality home buyers need to have made their commitment after this year and be paying a higher rate of interest than
when they initially took out the loan.

As well as its short-term mortgage relief scheme, the West Australia Government has a home Buyers Guarantee Scheme,
in conjunction in lending institutions. Those who qualify have their repayment level frozen for a three year period.

If the situation is really appalling, you may have to sell your home and get something which is less of a burden. If this is
case, the important thing is sell your home quickly, before the rising interest rates eat into the value of your home,
which is your greatest single asset.