Turning a house into a home can be an immensely rewarding experience. It can also be an expensive one. First, there's the mortgage itself, then there's stamp duty, conveyancing and legal fees.
And the expenses don't stop once you get the keys to the property. There's the cost of re-decorating; maybe you want to put in a new kitchen or build an extension. After that, there are items you may want to buy on credit such as televisions, sofas and carpets. If you don't budget carefully, you could easily find the repayments on your built-up debt too much to handle.
When most of your monthly incomings are going straight back out the door in the form of loan repayments, it can put a serious strain on your life. It's not much fun living on the bare essentials just so you can afford to service loans. The answer to the problem is really two-fold. You have to draw up a proper budget to minimise your day-to-day expenses, but, more immediately, you must find a way of reducing the amount of money that's going straight from your pay packet into your loan repayments.

Early action to avoid debt problems
The first step in solving debt problems is to get some outside help early. Getting some expert and impartial advice is often the only way to see past the problem to find a solution.
Paul Oliver, general manager of Bluestone Mortgages Australia, says this is the biggest hurdle. "When you're drowning in debt it's hard to see beyond the immediate demands and it can be embarrassing to talk to someone else," he says. "But the point is that someone not entrenched in the problems can help you think through strategies for the long term and not just the quick fix."
Oliver believes that people have to be realistic in order to stay in control way out of the debt trap of their finances. "Know what you can afford before you take on debt. Don't rely on the lender's assessment, do your own budget. If you're struggling with mounting debt, act early, because if you delay and miss payments it can make it far more difficult to find cost-effective solutions," he says.

Consolidating your loans
The best way to cut your outgoings to a more manageable level is to take a look at the loans you currently have and the interest rates you're paying on them.
Most personal debts are on a short-term basis (up to five years) so the monthly repayments are bigger. Credit cards, store cards and credit schemes also generally have high interest rates – up to 18%. Overall, more than half your repayments could be interest. That's dead money, going straight into the pockets of your lenders.
A consolidation loan could repay all your high-interest-rate debts and put them all into one more manageable
loan, over a longer term, at a realistic interest rate closer to the current base rate of 8.07%.
Oliver says a flexible mortgage facility is the best type of product to reduce payments. Many of these facilities are suitable for debt consolidation and there are often no restrictions on how many debts can be financed. "Our credit teams treat each case individually. There's no Corporationcredit-scoring or automated models to frustrate customers," says Oliver.

Get personal
Every story behind a debt problem is different. It may involve losing your job or an addiction to drugs, alcohol or gambling. There may have been a personal crisis such as divorce, injury or death of a family member that required credit card spending or expensive loans to sort out.
Unfortunately, credit-scoring bureaus are blind to these problems. The system looks at your finances and makes a lending decision without considering external factors.
Mark Stariha, general manager at Royal Guardian Mortgage Corporation, says this can be avoided by going to a lender who is prepared to look at all the information before deciding on the risk levels of the loan. "There's always a rate for risk, but it is how you perceive that risk," he says. "A client might be turned down for a consolidation loan by credit-scoring, but if we know enough about his background and have all the documentation, we may understand the risk better."
Stariha believes that people with very large sums in need of refinancing will often be better off with non-credit-scoring institutions.
"Credit-scoring banks will often turn down someone for a consolidation loan if they've only been in their job for a year – they see this as inconsistent employment history. In these cases it pays to get the personal touch," he says.

Pitfalls to watch out for
1. Count the costs before switching
A lender may offer an attractive interest rate on a home consolidation loan, but that's not the whole story. Costs can be a big part of switching lenders and you must decide if the improved interest rate warrants paying the fees.
Stariha says you must be careful about hidden fees. "When considering a new home loan, you must look at the costs of setting up and exiting the previous loan. There may also be lenders mortgage insurance [LMI]. If the costs are too high, regardless of the interest rate, it may not be worth switching. A better option would be to set up a personal loan. The rate will be slightly higher (11–12%) but the costs are much less."

2. Avoid telemarketers
Many lower-end lenders will charge huge fees as well as high interest rates. They do this by using telemarketing and other direct techniques to tempt people into consolidation loans they don't need. Nicholas Gruen, CEO, Peach Home Loans, says that some lenders trap people in consolidation loans with hidden fees and elevated rates. His advice is to consolidate only for the right reasons. "Many consolidation products are more expensive than they need to be," says Gruen. "They're often sold by nasty people at the bottom of the market. They charge thousand of dollars and hook people who are happily paying off their mortgage into a line of credit that gives them money to go on holiday. Often they end up paying more interest than before."

3. Get rid of the credit cards
Being psychologically ready for consolidation is vital, according to Gruen. If you've maxed out three credit cards, you may get a consolidation loan to pay them off, but if you start using them again, you're just making the situation worse. "For reasons of both tax and psychology, you should pay off loans as quickly as possible," says Gruen. "Many people consolidate, but they keep spending on their credit cards. This is as much a psychological as a financial problem. If you're going to consolidate, get rid of the credit cards."

Your Mortgage NO.72 MAY 2007