HOW TO SURVIVE THE COMING CREDIT CRUNCH

The current economic environment in Australia is gearing up to cause major problems for anyone with a home loan.

Recent moves by the banking regulator, APRA, to slow down the booming property markets of Sydney and Melbourne is set to cause the perfect storm of rising interest rates and falling property prices.

These policy moves have been ill conceived and poorly executed and will cause massive pain for people with mortgages.

The overall outcome will be a full blown credit crunch that will impact across Australia.

WHAT IS A CREDIT CRUNCH?
The textbook definition of a credit crunch is the sudden reduction in the availability of loans from banks for investors, householders and businesses.

We are already seeing the beginning of this with significant increases in interest rates and reductions in loan to value ratios (LVR’s) specifically targeted at investors.

These loan to value (LVR) reductions make it harder to borrow money.

Lending for investors and property developers is rapidly drying up.

Given we live in a debt based economy any restrictions on accessing credit can have severe consequences for the whole economy.

WHAT WILL BE THE IMPACT?
The impact of such policy moves on the Australian economy will be dramatic.

Most of the impact will fall on the individual investor. This will flow through the economy and will end up creating difficulties for everyone.

Rising interest rates will mean less money available for consumer spending.

It will mean very little lending available to build new homes and apartments, which will cause a slowdown in the Australia’s largest employment sector, the construction industry.

Properties will become harder to sell which will reduce taxation revenue the government receives from such imposts as stamp duty and Capital Gains Tax.

Overall, we may see, as many are predicting, that Australia will go into its first recession since the 1991-1992 recession.

HOW CAN I PROTECT MYSELF?
If you are an investor then there are a number of measures you can take to mitigate the effect of the credit crunch on your finances. You can do some or all of the following:
1. If you can afford it change your interest only loans to principal and interest so as to reduce your
interest rate.
2. Look at fixing your loan as a way to protect yourself against further rate rises.
3. If you live in Sydney or Melbourne consider selling your investment property.

For everyone else there is not a lot that can be done.

The best you can do is make sure you are paying off more on your home loan than you need to. This creates a buffer in case the economy really starts to slow down.

It may possible to refinance to get a cheaper interest rate but only if you make principal and interest repayments.

In the current circumstances you will not be able to change your repayments from principal and interest to interest only to take some of the pressure off. The regulators are intent on reducing interest only lending across the board so getting these types of loans will be next to impossible.

It will really be a case of finding shelter in the midst of a cyclone. Prepare to batten down the hatches.

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