That Debt " Bomb " !

A lot of people seem to have forgotten what happened when the 2008 debt crisis hit the world.  It became a lot harder to borrow money and the price of homes dropped sharply simply because of a lack of buyers.  As a result, a lot of people found that they had a mortgage greater than the realistic offering price for the house they lived in.

Most were lucky.  They struggled to meet mortgage payments on decreased incomes and miraculously this recession levelled out and house prices began a new round of steady increases - until the median price in most Sydney suburbs rose above a million dollars.  Many are still gambling on a ever rising market.   They can only just manage the present mortgage payment as long as interest rates stay at an all time low.

It is a sobering thought to remember that what goes down also has the capacity to rise and for a while back in the 1980's home mortgages hit seventeen percent.  Literally, world governments bought their way out of the 08 crisis by forcing interest rates lower and bailing out the banks and major financial institutions hovering on the brink of collapse.   In some countries, interest on deposits is now at negative levels.

The writing is on the wall. Just before Christmas the American Fed took the first tentative step upward with the promise that there would be more increases in 2017.   Our retail sector reports that customer spending achieved an increase on last years Christmas splurge and there is every reason to believe that much of this remains to be paid for on credit card debt.   The debt industry is sounding warnings.   Those who fail to reduce the amount outstanding by simply paying the minimum amount required by the credit companies are heading for disaster.

Many people treat the minimum payment as what the card company expects them to pay, despite the fact that they are able to pay a higher amount.   That is exactly what the card company hopes they will do because they are in the business of charging interest on whatever is owing - and the more the better.   Each month the amount owing carries over to the next bill, and if the customer is still buying - increases the debt.   Only paying the minimum amount means the debt takes years to settle and the total amount of interest is staggering. As the months flow by you end up paying interest - on interest !

Gambling on interest rates is very much like playing a game of musical chairs.   It is fine as long as the music keeps playing, but if it stops suddenly it will leave many without a seat.  The ever increasing price of houses means you can afford to buy outside of your comfort zone because it will deliver a handsome profit anytime you decide to sell.  As happened in 08, the withdrawal of buyers was sudden and the lenders were quick to implement foreclosure.

The people in the most trouble when interest rates rise will be those with the double whammy of a mortgage perilously close to their ability to pay and a big debt owing on credit cards.   They would be wise to reduce that credit card debt while they have the ability to do so because the rise of interest rates to traditional levels is more a matter of "when ""  rather than  "if  "  !