September 20, 2018 by Rebecca Crommelin
For majority of Australians, debt is the biggest burden on their household finances. Whether it’s a mortgage, credit card, car loan or other personal debt, it can be a cause of great stress to families across Australia and is on the whole not tax deductible.
The Reserve Bank of Australia (RBA) recently revealed that household debt in Australia has increased by more than household income over the last thirty years. This has been fueled by low inflation, financial deregulation and record-low interest rates.
Debt should always be well-managed as a vital part of your overall investment strategy. If you have a home loan, it’s likely the most significant debt you have. Luckily, there are several things you can do to pay off your home loan faster and reduce the amount of interest you pay over the life of your loan.
Make your repayments more often
You may not know this but the interest on most mortgages, credit cards and other personal debts is calculated on a daily basis. So if you make your repayments on your home loan more frequent, you may reduce the interest you pay overtime.
Even though it’s typical to make home loan repayments monthly, switching to fortnightly payments could help you pay off your mortgage quicker. There are 12 months in a year, but there are 26 fortnights. This means that by paying fortnightly rather than monthly, you pay an equivalent of an extra month’s repayment in the calendar year.
However, this doesn’t apply in situations where your lender calculates true fortnightly repayments. So it is worthwhile speaking to your mortgage broker before implementing this strategy.
Maximise your offset account
If you have a loan with an offset account, you should, where possible, deposit your income directly into your offset account. This will help to increase the balance of the account, which will help you to maximise the value of your offset account feature.
As we mentioned above, interest is typically calculated on your home loan daily. So, even if you use your offset account for your everyday spending/transactional account, the funds in your account will continue to offset the interest payable on your home loan – no matter how much is in the account.
Consider consolidating your debt
In addition to a mortgage, several households also have credit card or personal debt. This can often be overwhelming and hard to manage. Consolidating your debt can be a good option to help you manage your repayments and reduce the amount of interest you pay on your debts overall. There are a few different ways to consolidate debt and the best option for you will depend on your financial situation and goals.
One way to consolidate your debt is to streamline it into your home loan. This can be done by refinancing into a new home loan with a more competitive interest rate to reduce your total interest charges.
If you choose to consolidate your debt and refinance into a new loan, you will most likely increase the size of your loan, which may result in fees such as: discharge, early exit, application, settlement, valuation and more.
It’s also worth noting that by consolidating smaller loans into your mortgage you could be turning a short term debt (such as a personal loan) into a long term debt (your home loan). Before going forward with debt consolidation, you should consider the loan term and structure, interest rate and the lender’s terms and conditions, to ensure you are choosing the right strategy for your situation.
Important things to keep in mind
Debt consolidation should not be implemented as a quick fix option – you should always take a long-term view of such strategies. If you’re interested in streamlining your debt to help better manage your debt, then make a personal commitment to keep on top of your repayments and maintain good financial habits.
Consolidating your debts can be a favourable way to reduce the total interest you pay in the long-term. However, if you don’t maintain your repayments after refinancing, you may end up extending the repayment term on your loan. Before refinancing, you need to calculate whether the amount you will save in interest is more than the associated costs of setting up a new loan.
To find out whether debt consolidation is the right strategy for you, or you need help managing your debt - book a meeting with one of our brokers at Mortgage Choice in Perth CBD today.
