You can not consolidate existing debts into a new mortgage, not unless your new mortgage is substantially lower than the value of the property you are buying.

After consolidating other debts your mortgage must be at least 10% under the value of your home. Consequently if your current debts are $20k and your proposed property is worth $300k, you will need to have sufficient funds to buy this property – at least $15k, being 5% deposit and $15k for purchasing costs (if buying in Victoria for example.)

However if you also wish to consolidate other debt of $20k into this purchase, your deposit needs to be $15k +$20k + $15k = $50,000. Some of your First Home Owner Grant can be applied to this. Clearly if you have $50,000 to provide towards the deposit to start with then you do not need to look for a debt consolidation solution via a mortgage.

The segment of the market that is under the most pressure are First Home Buyer as they have most probably seen their equity eroded and today owe to their lender than their property is worth . That would make it impossible for these borrowers to refinance to a new lender with cheaper rates or consolidate their debts into their mortgage.

Some forms of debt consolidation, for example refinancing unsecured debts into your mortgage, does not reduce your levels of debt, rather what it does is reduce your monthly repayments. Home loan interest rates are lower than the applicable rates to unsecured loans and to credit cards, consequently consolidation of these into the mortgage can significantly reduce the overall periodic repayment. This is especially the case if your mortgage is paid on an “interest only” basis. However while this makes your repayments more affordable it does not reduce your overall debt…and this is important to understand.

Debt consolidation of several credit cards into a single personal loan can substantially reduce your repayments but requires the borrower to have a clean credit history and sufficient income to qualify for the new  loan.

A Debt Agreement, also known as a Part 9 Debt Agreement, will effectively reduce both your level of debt and your monthly repayment obligations, however this form of debt consolidation is damaging to your credit history.

Most people who struggle with their debts find that in the process they acquire a bad credit history as their creditors will register non-payment or defaults on their credit report. As a consequence when your credit history starts going downhill, so does your ability to borrow from a bank.

The most common solution under these circumstances is debt negotiation. For Debt negotiation to be effective, creditors need to be willing to settle for a lesser amount than their outstanding balance. Debt negotiation results in you having a lesser amount to pay. As the entire process is a negotiation there may be several stages to the proceeding before a settlement plan is confirmed and documented. Generally debt negotiation is finalized with a part 9 debt agreement.

A debt agreement is a legal document which sets out your monthly repayments as agreed to by your creditors and protects you for the period of agreement from being hassled by creditors looking for their money.

Although Debt Agreements should not be entered into lightly, they are an excellent tool for consumers who are struggling with debts and do not want to declare bankruptcy.

The HSBC Credit Card Monitor, published yesterday, confirms other recent research which shows the credit card market is changing as consumers reject gold cards.

According to HSBC, the number of Australian consumers using the average gold credit card has declined from 29 per cent to 15 per cent since 2009.

The number using a no-frills card (low interest rate, low annual fee or both) has increased from 63 per cent to 76 per cent over the same period

The number of people using a platinum or other premium card has remained stable at approximately 8%.
The true value of rewards offered by credit card providers has over time declined with consumers needing to spend more and more on their cards in order to benefit.

In 2008, the average spend required to gain the same reward was $16,700, and in 2003 it was just $12,400.

HSBC Bank Australia’s head of credit cards, David Walker, said consumers are being more realistic about their card use. If they are not going to spend enough to earn rewards they opt for a credit card that is the cheapest.

Demand for new credit cards has also fallen away significantly with existing card holders doing their best to consolidate debt and repay credit card balances as fast as they can.

Nine per cent of consumers included in the survey said they had cancelled a card in the past 12 months. People hold an average of 1.6 credit cards.

However if you would like to take out an unsecured loan your borrowing ability will be restricted to a handful of lenders offering cash loans or small loans for a few months. These loans can be very expensive with rates up to 49% p.a.

The problem with borrowing after bankruptcy is that you will find it difficult to qualify for a loan with your local bank and other traditional lenders. As long as your bankruptcy remains on your credit report it is important to try and approach lenders that specialize in bad credit loans.

A Part 9 Debt Agreement combines all existing unsecured debts into one consolidated debt. The debt or repayments that can be covered in a Part 9 Debt Agreement are unsecured personal loans as well as store cards, credit cards, etc. Other examples of these debts are, bills, overdrafts, credit card/store cards, school fees, personal loans. Any debt which has an asset attached to it can’t be included in a Debt Agreement. Therefore it is not possible to include your mortgages or car loans into a debt agreement.

A Part 9 Debt Agreement is regulated by the Australian Federal Government, Insolvency & Trustee Service of Australia (ITSA).

What the Part 9 Debt Agreement offers is a way for you to make a weekly, fortnightly or monthly repayment that are worked out based on your income and are affordable to you when taking into account your living expenses including home loans, car loans, entertainment, clothing etc. Whatever is leftover is offered to your creditors via a formal Debt Agreement Proposal.

One immediate benefit of an accepted Debt Agreement is that it offers the applicant debt relief from creditors who may be chasing you for money now. Any legal action taken against you to recoup money will stop, and no more interest payments can be added by your creditors. A Debt Agreement also does not attract interest charges, so all you will need to repay is the balance of your Debt Agreement.

When you have finished paying off the Part 9 Debt Agreement, all of your previous debts will be considered legally closed.

Generally speaking a lender will decline a loan application either on the basis of the borrower’s credit history, current levels of debts/obligations or lack of stable verifiable income.

Since the introduction of the National Credit Code, it is the lender’s responsibility to ensure that the borrower is able to afford the loan that they are applying for and consequently any lender you apply to will need to consider both your credit history and your income situation.

If you can offer some security for your loan, there may be a better chance of qualifying. Generally speaking your loan could be secured by a car or a boat or a house. In most cases the value of the security asset needs to significantly exceed the amount of money you are looking to borrow.

If you can not offer any security to qualify for a debt consolidation loan, you may need to consider a debt negotiation or a debt agreement. Under these circumstances, your debts are negotiated down on your behalf by a professional, resulting in reduced more affordable loan repayments.

In making a decision as to which way to proceed with debt consolidation it is important to remember, that consolidation for the sake of consolidation is not a good idea. Any strategy you choose to follow must offer you a better financial outcome than you are currently in.

Finance companies use a lot of tricks in their advertising to get consumers interested in a finance deal.

Almost one-third of consumers who have signed up to these deals in the past five years have been stung with interest, research by national consumer group Choice has found.

Choice spokeswoman Ingrid Just says while the deals seem appealing, they can prove costly.

Consumers do not understand that they will oncur fees even if they pay the purchase out in the interest  free period.

Get now pay later offers always appear attractive….but read the fine print.

Research by Choice also found a no-deposit, four-years-to-pay offer that charged $220 in fees and also charged 26 per cent interest from day one.

GE Creditline is one of the most commonly used interest-free credit cards and is used in more than 10,000 stores nationally. Other key providers include David Jones’s American Express store card and HSBC.

Make sure you find out what the interest rate applicable to your store card is – often they are beyond 20%..

Canstar research manager Chris Groth says consumers should make the most of interest-free purchases, but should make sure they work for them.

“You can definitely use them to your advantage and they are genuine, so there is an interest-free component for a certain period,” he says.

“But make sure you know when the interest-free period finishes and know what the revert rate is once it ticks over.

“You may need to make scheduled payments during the interest-free period.

“My recommendation is to use it but don’t let them use you, pay it off within the interest-free period and you’ll be a happy camper.”

Debt Consolidation Australia see the tail end of consumer credit transactions going very wrong…applicants with tens of thousands of credit cards, store cards and other finance deals that they can not afford find themselves needing to take up a debt agreement simply to resolve their debt problems.