What? Me wait? Hell, no! As Queen’s frontman Freddie Mercury used to croon at us, “I want it all, and I want it now.”
Praise be to debt! Credit, most certainly, be a wondrous thing. Debt alloweth you to purchase things you could not actually pay for from the fatness of thine own wallet. It empowers us. It endows us with the ability to instantly satisfy. Yeah!
We want the huge McMansion, we want nice stuff to fill it with and we want nice cars in the driveway. Now, if you wouldn’t mind.
Not so fast. What price are you prepared to pay for that lifestyle?
There’s the cost of interest, sure. So, as long as you can meet the repayments, you’ll be right. Won’t you?
Maybe, but at what price? Given banks’ willingness to lend, how are you supposed to know when to stop?
More: Australia, drowning in debt
Whether you’re buying your house and land package in the outer suburbs, or bidding for your first inner-city apartment or suburban quarter acre block, too many take on too much debt, acting like we were collecting football cards or Barbie dolls.
Debt, in the wrong hands, can be as dangerous as a loaded weapon with a titchy firing mechanism and a propensity to backfire.
Don’t borrow the maximum that any old lender tells you that you could borrow. Ease back on your first home loan. What you can comfortably “afford” and what you a bank will “lend” you are often miles apart.
Why do people get into trouble? How do smart people use credit?
Let’s start with the financially, um, illiterate. They’ve usually never got the concept of saving, the absolute basis of wealth creation. They want to buy a house with three-eighths of a third of not very much of a deposit.
They find a bank that will lend them enough money to make their eyes pop out of their heads. Instead of saying: “You’re kidding! A bank will lend us how much money?”, they say: “Cool, where do we sign!”
And the slippery slope has just been oiled.
Smart debt users know, primarily, that the debt needs to be repaid. And they need to make sure they can do that.
Here are five things smart debt users know about debt.
One: Make your home your castle, not the bank’s. Paying your home loan down (through early repayment, redraw, or offset accounts) is critical. Once it’s at a “comfortable” level, then be ready to move to the next stage of, potentially, further investment in shares or property.
Two: Heed the warnings of the banks’ own innate cautiousness. If none of the major banks will lend you money for a home, find out why. Should you go to a minor/fringe lender, just because they will lend you money now? Or should you spend a few more months saving so that you can fit the banks’ restrained criteria.
It would be better to have lenders fighting for your business. Have the major banks say “yes, we’ll lend you the money”, but then maybe go with a smaller lender, because of better service or being cheaper.
Three: Don’t accept every credit limit increase someone offers you. If you don’t need loads of extra room on your credit card, or line of credit home loan, don’t take it, lest you get tempted to use it. If you do use it to buy rubbishy, want-it-now consumables, you’ve fallen into their trap. And you’ll be paying them exorbitant interest rates forever.
Four: Don’t borrow for property right up to your limit. Just don’t. Always have a buffer for times of real need. Better still, have a cash buffer, rather than just the ability to borrow more.
Five: Ask yourself what happens if rates REALLY jump. Find out if you could afford repayments three to four per cent higher than today’s rates. Interest rates are currently very low. If you’re not making extra repayments on your loan now, you will probably never be able to afford to. There will be times during your mortgage, hopefully shortlived, where interest rates do get pretty high.
It’s easy to get in over your head, particularly with a home loan. Debt can be a fine tool for wealth creation. But you can have too much of a good thing.
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Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser and mortgage broker. bruce@debtman.com.au.