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Loan, sweet loan now a nightmare

25 March 2012, BY JASON BRYCE, The Courier-Mail (news.com.au)

UNREALISTIC expectations, huge mortgages and falling property prices are putting families at risk of big debt problems and even bankruptcy.

Many homeowners owe more on their mortgage than their house is worth. They are in negative equity.

However, many don't realise it or the fact that selling their home - or refinancing and consolidating debts - isn't possible.

Many homeowners have a completely unrealistic idea about how much their home is currently worth, according to Deborah Southon, executive director of debt consolidation agency Fox Symes.

"What we are seeing right now is people coming in and saying our house is worth $450,000, for example, but when we get a professional valuation it is in the three hundreds," Ms Southon said.

"Homeowners always think their house is worth more than it really is. They say things like 'I did this renovation and I added that', but they can be very wrong and it can make refinancing impossible."

Fox Symes is Australia's largest debt solutions company.

Ms Southon specialises in helping people with unmanageable debts to consolidate their unsecured debts into a refinanced mortgage or enter into debt agreements with creditors to pay off their debts at an affordable rate.

"What we have been seeing lately are people who can't refinance or even sell their homes to get on top of their debts, because their mortgages are so high compared with their value of their home," she said.

"Queensland is suffering from this more than other states.

"What we have been doing for people in this situation is trying to use debt agreements as a kind of moratorium on repayments for eight or nine months to allow homeowners to sell their home in an orderly fashion, but creditors are not very accommodating of that kind of arrangement.

"Some home loans are just so huge now, and couples are paying out 60 to 70 per cent of their income just on mortgage repayments.

"The biggest I have seen lately was a couple paying $850 per week in mortgage repayments from a combined income of $1100 per week.

"Now that seems like a good weekly income, but they just couldn't keep up the repayments, which were over 75 per cent of their pay."

In Brisbane, for example, property prices fell 6.8 per cent last year and are almost 9 per cent below their peak, according to RPData/Rismark.

"People who bought three years ago are behind right now and unless they have knocked a lot off their mortgage, they are not going to be able to refinance,'' said Dion Lemming, of Aussie Home Loans, Mermaid Beach.

"For an average three-bedroom house, a $50,000 renovation might mean your property is only just worth the same now as three years ago.

"Vendors are saying 'I've spent $50,000 on renovations, my house should be worth more now than when I bought a few years ago', but generally that isn't the case.

"And without a substantial `reno', houses are worth less, much less now than three years ago."

Ms Lemming said borrowers who were taking out a mortgage worth 95 per cent of the value of the home should not expect to be able to refinance anytime in the foreseeable future.

"The issues with refinancing are that homeowners have expectations that are just unrealistic," Ms Lemming said.

"If you bought a home, or especially a unit, in the past three years, you are behind right now."

Despite the growing negative equity problem, lenders are increasing the size of loans they will approve.

The highest loan-to-valuation (LVR) ratio allowed by a lender is 98 per cent, with mortgage insurance, from Teacher's Credit Union.

ANZ, Westpac, Queenslanders Credit Union and Credit Union Australia all offer 97 per cent LVR home loans, according to data supplied by InfoChoice.

Almost all lenders offer 95 per cent LVR home loans.

"We are doing heaps of 95 per cent loans now," said Ms Lemming.

"Just about all first homebuyers are borrowing 95 per cent now.

"For a little while there, after the global financial crisis, lenders dropped back their loans to 90 per cent, but they are all now back to lending at 95 per cent.

"However, for refinancers, no one is going above 90 per cent and ANZ are only going to 90 per cent for their own customers."

Ms Lemming said house prices were following unit prices down.

"But unless you are earning really good money, say mining money, and you can knock a lot off the mortgage in the first few years, you should consider that you won't be able to refinance any time soon."

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