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With all-time low rates, is debt stress an issue?

July 2, 2020  |  #Debt #Finance

How are Australian's coping with debt stress, and what will happen when JobKeeper payments end?

With ongoing economic challenges due to the COVID-19 pandemic, the economies of almost all countries are struggling. People are losing jobs, businesses are shutting down, and the stress of financial stability is at its peak. The Australian government is taking all steps possible to support and boost the economy and its people; however, the measures have not been enough to manage the Australians’ debt stress. 

Understand how a financial adviser can support you with your need for financial security. Get in touch.

Current Interest Rates & Debt Stress

Interest rates play a critical role in determining the current state of the economy and its recovery pace. They affect the borrowing cost, with low-interest rates making borrowing cheaper and bringing more money into circulation. In the present times of economic crisis, the RBA decided to drop the cash rate to an all-time low of 0.25% to keep credit costs low and boost the economy. The cash rate is not expected to rise until Australia’s economy starts moving towards recovery. 

However, despite the low-interest rates and low borrowing cost, levels of debt stress are unbelievably high. People are not coping with economic uncertainty and the effects of the recession. Many households are experiencing financial stress due to loss of jobs, pay cuts, reduced working hours and lower-income from properties. 

Almost all households, including the battlers and the affluent ones, are suffering from mortgage stress. According to the latest data from the Digital Finance Analytics, the percentage of households in debt stress has reached 37.5%, equating to about 1.42 million households. The highest exposure is visible on the young families, including first-time home buyers. The accumulating debt stress may lead to up to 100,000 loan defaults and many property sales or foreclosures. 

What will happen when JobKeeper payments end? 

The Australian government is doing all it can to keep millions of citizens in work or at a good income level. The $130 billion JobKeeper scheme of the government is keeping over 835,000 businesses above the surface, and about 5.5 million workers employed. 

Despite the governmentefforts and the support of the JobKeeper scheme, many households are becoming incapable of managing their debts. The more critical concern is for the times after the scheme ends in September 2020 when there will no longer be wage subsidies and mortgage repayment holidays. 

Many households currently depend on the JobKeeper scheme to keep their wheels running and paying their financial obligations, including debts and mortgages. The quick and blunt withdrawal of the scheme may make the economy more fragile and we may face higher defaults on loans and mortgages. 

Ways to reduce debt stress

Debt stress remains an issue for many Australian’s and is expected to worsen for some once the JobKeeper scheme is withdrawn in September. But it’s important to remember there are things that you can do and assistance is available to help you better manage your debt and the stress that it causes. 

Read our article A Guide to Managing Your Debts.

Make a budget, and stick to it

A simple but effective way to better manage your debt, and what we always go back to is to make a budget. One of the leading causes of stress and anxiety is a lack of awareness and uncertainty. By clearly outlining your income and expenses, there are no nasty surprises. In times like these where your income may have changed, it is important to revisit your budget frequently.

Take advantage of bank offerings

One option to consider is pressing pause on your home as some lenders are offering deferral on payments for up to 6 months, but what are the pros and cons of this option and what should be considered before taking up this offer? What else might be available? Read the full article on Reducing Your Homeloan During COVID-19.

If you’re a landlord with tenants facing financial hardship, here’s how you can manage the impacts of COVID-19.

Refinancing

With interest rates currently at all-time lows, there’s a very high chance that there are better loan options out there for you. Refinancing your home loan could potentially save you a lot in interest over the term of your loan. But before you do refinance, you should consider a number of different factors and whether or not it is the ideal option for you. For more information, download our refinancing guide.

Debt consolidation

If you have multiple smaller debts, consolidating them into one larger loan can make it easier to manage the due dates and payments. There are a number of benefits of debt consolidation in addition to reduced stress including a potentially lower interest rate due to the larger principal amount. However, borrowers must remain aware that debt consolidation does not erase or reduce debts but only restructures and rearranges them. There may also be other fees like early exit associated, and it may not be the best option for you financially. For more info, read Is Debt Consolidation A Good Idea?

Prevent debt stress through education

Relevant financial education also plays a significant role in managing debt stress. The individuals who learn and know about budgeting, personal finance, debt management, and various strategies are less likely to get bogged down by debt stress. They keep updating their knowledge through books, discussions, podcasts, and blogs and are confident of managing their debts and associated stress. 

Reach out for help

You are not alone. There are many organisations that are available to reach out to for help. Lifeline and Beyond Blue are just two examples of many wonderful organisations, with more listed here.

Are you facing financial hardship?

 It can be hard to know where to start when facing financial hardship. With so much information out there, we’ve simplified it with a simple action plan. Download your action plan here

If you’re needing an extra helping hand and are ready to speak with a financial planner, please get in touch

What you need to know

This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.