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Brokers are advocating for clients to prioritise paying off their government debts, even if it means a lower mortgage deposit.
Cara Giovinazzo at Borro has been advising clients with HELP/HECS debt to pay it off, even if it means having a smaller deposit.
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She mentioned that paying off the debt enables clients to borrow more money, saying: “For instance, by paying off a $30,000 HECS debt, they might be able to borrow an additional $100,000. The net gain is still $70,000 higher.
“These are the scenarios we’re running with our clients to show them how to maximise their borrowing capacity,” Ms Borro said.
It came as the illion Credit Stress Barometer for September 2023 continued to indicate a prolonged trend of worsening credit default risk, leading brokers to get creative with how they assist their clients.
Data revealed that the credit default risk among Australian consumers surged by 11 per cent since January 2022 and further increased by 8 per cent by September 2023.
However, a positive signal emerged with a 2 per cent decline in Q3 2023, marking the first sign of improvement in approximately 12 months.
illion suggests that Australian consumers may have begun adapting to their economic circumstances by positioning themselves better to manage associated risks.
Managing broker at GSC Finance Solutions, Matt Turner, emphasised this strategy’s relevance for first home buyers, stating they would do “anything to get into the property.”
“We have even started having conversations with borrowers about clearing HELP debt to boost their income to service new loans,” Mr Turner said.
“With refinancers and upgraders consolidating car loans and credit cards [it’s] becoming also increasingly common to achieve their goals.
“Borrowers are always looking at ways to cut expenses.”
For first-time home buyers not yet ready to purchase, Mr Turner mentioned a savings strategy, requiring them to save their minimum mortgage payment plus an additional 0.50 per cent.
This demonstrates their ability to comfortably manage a mortgage.
“For others, we are providing the best estimate of repayments into the future and having frank conversations about budgets,” Mr Turner said.
Despite ongoing credit risks, illion’s data indicated no significant improvement in mortgage stress, particularly in major capital cities.
Downsizing is a good option
While credit stress is apparent, Mr Turner has not experienced any clients missing payments.
“We are consistently having conversations with clients about reviewing rates, strategies to reduce their repayments, and converting loans to interest-only to relieve the pressure valve,” he said.
“More recently, we have been talking clients through the sale of their investment properties and downsizing homes to get some relief.”
Ms Giovinazzo echoed the sentiment, emphasising the current trend of downsizing to reduce mortgage debt.
“It’s happening left, right, and centre. People have these properties that have got a lot of capital growth over the last few years, but the debt they’re repaying has been close to doubled and it’s just not a comfortable lifestyle for them anymore,” Ms Giovinazzo said.
“Lots of people are downsizing currently to have more affordable mortgages because rates have gotten so high and that essentially does help because there’s such little stock at the moment, especially in Brisbane.”
However, she highlighted that consumers are becoming adept at addressing financial concerns before reaching a critical stage of late repayments or defaults.
[Related: Borrowers ‘get creative’ amid economic challenges]
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