Are Australians heading for a mortgage meltdown? Everyone from the Prime Minister to the head of the Commonwealth Bank has expressed concern about the potential plight of overcommitted borrowers.
As they see it, a growing number of people could be putting themselves in a precarious situation by taking out massive loans at a time of historically low interest rates and high property values.
With personal debt also at record levels, the fear is that even a small rise in interest rates could be enough to tip people over the edge.
And there appears to be grounds for these concerns. Since the beginning of 1990, Australians have gone from owing $51.8 billion on their mortgages to $228 billion.
Many of us have embraced home equity-style loans that allow us to gear into the stockmarket or fritter away equity on holidays, cars and other items without feeling the pain of high credit card rates.
And we have pushed our personal debt up to record levels, with $4.2 billion outstanding on credit cards alone.
While as individuals we may not think there is much cause for concern, all the signs point to the need to take a conservative approach to our borrowings.
A weak global economy, the threat of war in the Middle East and the worsening drought are all creating a climate of uncertainty with economists forecasting a slowdown in the Australian economy in the coming months.
With so many of our financial arrangements interlinked, often all it takes is a period of unemployment or an extended bout of illness for it all to come tumbling down like a house of cards.
So what can you do to strengthen your position and ensure you can handle any downturn in your fortunes?
Recognise the dangers
As much as we try to ignore it, the odds are that drinking, smoking and life on a couch will eventually bring our health undone.
In the same way, borrowing to the hilt, paying over the odds for a property and failing to take out adequate insurance to cover the bad times can also be detrimental to our financial health.
Rod Cornish, the head of property research at Macquarie Bank, believes there would need to be a 4 per cent rise in interest rates before Australian households face significant financial pressure.
But he says there is the possibility of price falls at the "low value" end of the first home-buyer market, adding that those who invested in units without features that set them apart from the crowd could also find values coming under pressure.
Preventative steps
Prevention is nearly always better than cure. There are several steps you can take at the outset to make sure you do not end up struggling to meet mortgage repayments.
Lisa Montgomery, the chief executive officer of InfoChoice, says before taking out a home loan, borrowers should ensure they can cope with an interest rate rise of between 1 to 3 per cent.
There are plenty of websites that help you calculate the impact of any rate rises on your mortgage repayments and a good mortgage broker should always make similar calculations for you before you sign up. Further, keep saving until you have a deposit of at least 10 per cent, if not 20 per cent, of the value of the property you want to buy.
Guard against running up expensive debts furnishing or renovating your new home.
Existing borrowers should also make sure they are not vulnerable in the event of a crisis. One way to lessen the impact of future rate rises is to start making extra repayments now, Ms Montgomery says.
Choosing to pay an extra one percentage point in interest on a $200,000 home loan would cost about the same as a weekly trip to the movies for two adults, she says.
If rates rise by one percentage point, the monthly repayment on a $200,000 home loan would increase by $127.92 to $1487.10.
Choosing to make weekly or fortnightly, rather than monthly, repayments can also have a significant impact on the total amount of interest you pay.
Use the right product
The type of mortgage you choose can make a significant difference to your wealth.
While fixed-rate loans can provide the security of fixed repayments during times of rising rates, they generally do not allow borrowers to make extra repayments, says Louise Biti, national research and technical manager at ING. "That's why often it is worthwhile having the combination of a fixed and variable-rate loan."
Graeme Matthews, the chairman of the Mortgage Industry Review Committee, says people are often unaware that they can incur break fees of between $8000 and $10,000 if they refinance a fixed-rate loan.
"Too often they find that out after they've already organised the second loan and at that point they haven't got an extra $8000 to $10,000," he says.
Many experts also warn borrowers against line-of-credit home loans, which are supposed to help you save on interest because your salary is deposited directly into your mortgage.
But Karen Cox, coordinator at the New South Wales Consumer Credit Legal Centre says: "These products are dependent on you leaving a considerable amount of your income in your loan account and they usually attract a higher interest rate.
"If you are already experiencing financial problems, you are likely to find you will have considerable difficulty making headway on your loan without the discipline of making regular set repayments."
Chris Connolly, the director of the Financial Services Consumer Policy Centre at the University of New South Wales, says people are probably better off opting for a mortgage with the lowest possible interest rate.
"The difference between a plain vanilla home loan and a bells-and-whistles product could be as much as 1.25 per cent, which is thousands and thousands of dollars," he says.
The rates on basic mortgages start at 5.39 per cent. These mortgages generally have rates that are below the 6.57 per cent rate charged on standard variable-rate products because they may not include features such as redraw or mortgage offset.
Heed the warning signs
Narelle Brown, coordinator at Ryde Eastwood Counselling Service, says the alarm bells should start ringing if someone finds it difficult to handle other forms of debt.
"I think most people would feel their mortgage is their first priority, so what will happen first is other debts, like credit card debt, will start to grow," she says.
They may also find that they are only managing to meet the minimum monthly repayments on their credit cards rather than paying it off in full each month.
Being hit with late fees and penalties because you are not paying your bills or receiving letters and calls from debt collectors are other signs that you are getting in over your head.
If someone gets to the stage where they are using their credit card to meet mortgage repayments or missing repayments altogether, they need to get help.
You can get help
People often put off asking for help because they fear they will lose their home at the first sign of struggle. Mr Connolly says small-business owners or farmers with a business loan secured by their house may need to be wary about approaching their lender without first seeking the advice of a lawyer or an accountant.
In that situation, he says, a request to extend an overdraft to get through a dry spell can lead to an aggressive review of the person's financial situation and the possible sale of assets.
However, he adds: "With home loans there is no history of the banks being too quick on the draw.
"The best advice is to seek a meeting with the bank as soon as possible and work out what your options are."
Alistair Jeffery, the chief executive of Bluestone Mortgages, a non-conforming lender, suggests doing that well before you are four months in arrears. Otherwise it will be noted on credit reference agency databases and the record will be maintained for at least five years.
If you need help in approaching your lender or if you have multiple debts, try contacting a financial counsellor. They will review your financial situation and help you negotiate with your lender. Best of all, their service is usually free, which is crucial when you are struggling.
Ms Cox cites an example of clients compounding their problems by responding to a finance broker's advertisement in a newspaper. The finance broker said they would refinance any borrower regardless of their credit history.
At that stage, the clients were a few payments behind on their home loan and were receiving threats from a debt collector because they were not keeping up with their credit card payments. Things went from bad to worse when the solution offered by the broker turned out to be inadequate and the clients tried to withdraw from the transaction.
"Now they are being pursued for thousands of dollars in brokerage fees in addition to their original debts," Ms Cox says.
She says the clients have been able to organise refinancing with a major bank after making their own inquiries but are still embroiled in a dispute with the broker.
The moral of the story?
"Beware of people who claim to have the answer to all your problems but may, in fact, be motivated by earning a sizeable commission from you, the lender or both," Ms Cox says. "You need to conserve your resources to meet your existing commitments, not create further expenses."
Map out a recovery program
The road to recovery should start with a thorough review of your finances. Could you get a boarder to reduce your mortgage burden?
Is it possible to use some other savings or sell some other assets?
Look at consolidating debts to reduce interest costs and identify areas where spending can be cut back. If you are already struggling to meet mortgage repayments, there can be a number of options.
Lyndell Fraser, the general manager for mortgages at the Commonwealth Bank, says these could include extending the loan term or taking a repayment holiday if the borrower is ahead in their repayments.
Alternatively, someone who has been paying off the principle and interest on their home loan could consider reverting to interest-only payments for a limited period.
"It is not something that you want to do for a long time but it can be a sensible way to get a breather," Ms Fraser says.
Unless you choose to refinance, there should be no additional charges for these options.
Of course, if someone has already exhausted these options and is facing a sustained period on a lower income, it may simply be time to consider selling up and buying a cheaper property.
Stick to your strategy
Whether you are taking preventative steps or struggling to keep up repayments that have been varied, it is important to take a disciplined approach to your finances.
If you decide to build a financial buffer for hard times, make sure regular payments are taken directly out of your salary.
Or if you decide to consolidate large debts into your home loan, chop up all bar one of your credit cards and resist all offers to increase your credit limit.
Remember, unless you stick to your financial strategy you will get about as far as the person who spends hours at the gym and then gorges on a double choc sundae as a reward.
Each week financial advisor Noel Whittaker answers your
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