Thousands of Australians experience financial stress on a daily basis and the hardest hit are usually families.
In fact, the past financial year has seen part IX debt agreements rise by almost 2% to 10,911 and around 15% over the last quarter, according to the latest data from the Australian Financial Security Authority (AFSA).
Although you’re trying to get back on your feet, banks rarely look into the reasons why you’ve had trouble in the past and how you’re now in a better financial position.
Despite this, you may actually be in a position to use the equity in your existing property to refinance your mortgage and pay out your part 9 debt agreement sooner.
How can you pay out your debt agreement?
Under a Part 9 debt agreement, you cannot legally borrow money to pay down your debt agreement. It’s only once you’ve finished paying off your part IX agreement and you’re discharged that a select few lenders may consider allowing you to borrow.
If you currently have a home loan and are in part IX agreement, there are non-conforming or specialist lenders who may allow you to borrow up to 80% of the property value to pay out your agreement.
Are you qualified to refinance?
In order to take advantage of this part 9 agreement refinance solution, you’ll need to have sufficient equity to accommodate the increased loan amount as well as meeting all other borrowing requirements.
You’ll also need to:
- Owe 80% LVR (Loan to Value Ratio) or less on your property, depending on your situation.
- Clear out any defaults on your credit file and ensure that they are no longer showing.
- Have full evidence of a stable income.
- Have a clean repayment history on your mortgage for the past six months.
- Have been in your part 9 agreement for at least 12 months and show evidence that you’ve made perfect repayments over the past 6 months.
- Provide a strong case to the lender.
If you meet the above bank criteria then you can qualify for a home loan with a specialist lender, typically at a slightly higher interest rate than the Bank Standard Variable rate (usually 2% to 4% higher).
Complete our free assessment form so our brokers can get in touch with you to discuss your situation. We can find the right solution for you!
How do you calculate your equity?
You can calculate the equity in your home by subtracting your loan amount from the estimated value of your home. This means:
Property Value – Loan Amount = Equity
For instance, if your home is worth $500,000 and you owe $200,000 then the calculation would look something like this:
$500,000 – $200,000 = $300,000 in equity
The equity in your home is usually the biggest asset that you have. To get a better idea of the estimated value of your home, you can go through our How To Value A Property page.
How do specialist lenders work?
Non conforming lenders are usually more flexible when it comes to borrowers in tough situations than compared to major banks. What that means is that they are much more likely to consider loan applications that major banks usually decline.
The reason for this is that your home loan application is assessed on a case by case basis by a specialist lender so you’ll have the opportunity to present to the lender strong reasons and evidence for how and why you got into a tough financial situation and how you’ve since been making payments on your financial commitments on time.
Another benefit is that non conforming lenders may often approve loans quickly in order to meet the creditors’ deadlines.
In addition, you can often get a cheaper interest rate if you’re borrowing less than 80% of the property value (so if you have a large deposit or sufficient enough equity).
Understanding a Part 9 debt agreement
Entering into a debt agreement is an alternative for individuals to declaring bankruptcy. This type of agreement helps people overcome financial hardship that may have been caused by such issues as missed bill, credit card and personal loan payments as well as mortgage defaults.
The Insolvency and Trustee Service of Australia (ITSA), a federal government body, regulates Part 9 debt agreements.
To be in a part 9 debt agreement means that your name will be listed in the National Personal Insolvency Index (NPII), a permanent record of bankruptcies, that is open to the public, including the banks!
What information is recorded on the NPII record?
Personal information that is recorded on the NPII record includes:
- The name, date of birth (if known), residential address and occupation of the person (as disclosed on documents accepted by the Official Receiver).
- The person’s previous names and aliases, if any.
- The type of proceeding, the date it started and the administration number.
- The name and contact details of the trustee or administrator of the proceeding.
- The current status of the person and/or the proceeding. For example, whether a person is discharged from bankruptcy or whether a creditor’s petition for a person’s bankruptcy is in progress.
Remember, no Australian lender is legally permitted to lend to someone currently in a part IX debt agreement.
What happens when the debt agreement ends?
You will be discharged from the agreement when you fulfil your obligations under the debt agreement.
Even after you exit the debt agreement though, the record will remain on your credit file for up to 5 years. This may severely affect your ability to qualify with a major bank or lender.
What are the reasons Australians are unable to pay their debts?
At the moment, it’s quite easy for someone to get into debt. Australia’s high living expenses often lead to people taking on too many financial commitments or overspending on items that they wouldn’t be able to afford without the help of a credit card.
More and more people are living beyond what they can otherwise afford. This is one of the reasons why a number of Australians are falling into debt and are ultimately getting into part 9 debt agreements, or worse, declaring bankruptcy.
You can use our living expenses calculator as a general guide to estimate your living expenses.
Other than spending beyond one’s limit, being unable to pay debts usually comes down to:
- Job loss and unemployment: Losing a job is often an unexpected turn of events and can lead to financial instability in an instant. You should make a habit of contributing regularly to a savings account and speaking with your employer about severance packages or payouts that you’re entitled to should you suddenly become unemployed.
- Uncontrolled credit use: The costs of constantly paying for items and bills on your credit may rapidly add up to the point where you exhaust your credit card and may be unable to meet even the minimum payments required.
- Divorce: With divorce rates on the rise, it comes as no surprise that divorce is a common cause of all personal bankruptcies. The struggles of court fees, child support, and more importantly, the transition from a dual-income to a single-income household, are all factors that make it difficult for someone to pay their debts.
Are you in a part 9 debt agreement?
Call us on 1300 889 743 or complete our free assessment form to find out how we can help you move from a part IX agreement, to a specialist lender and, eventually, back to a major lender at a sharper interest rate.
Our brokers will be with you all the way through your journey.