Monitor make-up of debt

HOUSEHOLD debt in Australia is high but more of us are taking a sensible approach to debt management.

Nationally, our household debt ratio is nudging 200 per cent. On paper it means we owe twice as much in debt as we bring home in our pay packets each year. It’s an alarming figure; however, the reality is that some of us owe more, others less.

The question is, is debt a problem?

The answer lies in the makeup of your personal debts.

Given today’s high property prices, it’s not surprising that home loans often account for the bulk of personal debt.

But this is what I call “good” debt because your loan will be whittled away over time while the value of your home should steadily rise.

A study by the Bank of International Settlements found Australian home values have risen 6550 per cent since the early 1960s so, if you can handle your repayments and you’re confident you’re getting a good deal on your home loan, this type of debt may not be such a problem.

In addition, data from banking watchdog APRA shows Australians are taking a more cautious approach to borrowing.

In the past quarter, just 21 per cent of new home loans involved a deposit of less than 20 per cent. Ten years ago, that figure was closer to 37 per cent.

Stumping up a bigger deposit means lower repayments, more home equity and extra wiggle room if interest rates rise further down the track.

But it’s not just home loans that we’re managing better.

Comparison site Finder says debit card spending is tipped to outpace credit card spending by August 2018. It could be an important tipping point where we rely less on high-interest debt and more on our own money to make purchases. And that’s a good thing. Sure, some Australians are experiencing financial stress, and it can be an extremely challenging situation.

Interestingly though, Reserve Bank data shows the most financially stressed households are not home owners with a mortgage, but rather low-income earners facing high rents.

It always makes sense to monitor your debt levels, think carefully about taking on extra debt, and take early action if repayments look like becoming a problem.

However, if you are comfortable with good debt, and aim to minimise bad debt like credit card balances, you’re heading in the right direction.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.