Is debt a problem? The answer lies in the make-up of your personal debts. Given today’s high property prices, it’s not surprising that home loans often account for the bulk of personal debt. But this is what I call ‘good’ debt because your loan will be whittled away over time while the value of your home should steadily rise.
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The gradual uptick in home values is a long term trend. A study by the Bank of International Settlements found Australian home values have risen 6550pc since the early 1960s. In 1983, my wife Vicki and I purchased our first home for $90,000; today that property would be worth close to $2.2 million.
If you can handle your repayments and you’re getting a good deal on your home loan, this type of debt may not be a problem. In addition, data from banking watchdog APRA shows Australians are taking a more cautious approach to borrowing. In the past quarter, just 21pc of new home loans involved a deposit of less than 20pc. Ten years ago, that figure was closer to 37pc. Stumping up a bigger deposit is a smart move. It means lower repayments, more home equity and extra wiggle room if interest rates rise further down the track.
Sure, some Australians are experiencing financial stress, and it can be an extremely challenging position to find yourself in. Make sure you monitor your debt levels, think carefully about taking on extra debt, and take early action if repayments look like becoming a problem. However, if you are comfortable with good debt, and aim to minimise bad debt like credit card balances, you’re heading in the right direction.
