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Painful Mortgage Defaults – An Overview

December 24, 2014

There has been a wave of painful mortgage defaults all over that has brought many powerful economies including UK, US, Spain and Canada to their knees. However, Australian borrowers have been the fortunate bunch.

As per the recent information published by Reserve Bank, it concluded that size of the debt that a person takes makes the big difference especially it is going to affect LVR loan-to valuation ratio that is proportion of the property purchase funded with borrowed money. For instance- If a person takes a loan with a LVR of 90% or above then the possibility of missing a payment is three and a half times greater than that of a loan with a LVR of 60 percent.

It is believed that, this is the reason why majority of banks try to compel a borrower with LVR of 80 percent or more to go for mortgage insurance too. This can dramatically add thousand of dollars to the cost of a loan. The thing here to note is, mortgage insurance benefits bank from default but not the borrower.

Other thing to be aware about is, only loan size does not matters there are other potential risks to be aware about such as :

  • Borrowers who pay higher interest rates are also likely to suffer. For instance, In case, there are two identical loans and one has an interest rate that is 1 percent higher than in this case, borrower is about 1.4 times likely to fall behind.
  • Secondly, other people who regularly pay off their credit card payments are not going to fall behind on their mortgage.
  • Lastly, People who take low documentation loan are likely to face a hard time as in these cases banks do less or negligible checking of the financial status of the borrowers.

This research shows, its it worth being extra careful with mortgage payments especially if you fall into any of the above mentioned categories such as a high LVR loan, credit card debt or a low doc loan.

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