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Reducing mortgage debts and consolidating loans

For most Australians, debt is the greatest burden on their household finances. Whether it be their mortgage, credit card or otherwise, debt can be a source of significant stress to family across the country and is on the whole not tax deductible.

The Reserve Bank of Australia recently highlighted the fact that Australian household debt has increased by more than household income over the last three decades. This has been fuelled by historically low interest rates, low inflation and financial deregulation.

Debt should be managed carefully as a key part of your overall investment strategy. If you have a home loan it’s likely to be your most significant debt. Fortunately, there are a number of things you can start doing to repay your mortgage faster and reduce the amount of interest you pay overtime.

Increase the frequency of your repayments

What you may not know is that the interest on most mortgage, credit card and other personal debt is calculated on a daily basis. As such, if you increase the frequency with which you pay your home loan, you may reduce the interest you pay on the life of the loan.

While it’s common to make home loan repayments on a monthly basis, making the switch to fortnightly payments could help you pay down your loan ahead of time. There are 12 months in the year, however there are 26 fortnights which means that making fortnightly instead of monthly repayments is equivalent of an extra month’s repayment per calendar year.

Of course, this does not apply in cases where the lender calculates true fortnightly repayments so it is worth checking in with your broker before adopting this strategy.

Get the most out of your offset account

If you have a home loan with an offset account, it’s always a good idea to, where possible, deposit your income directly into your offset account, you can increase the balance of the account, which will ensure you maximise the value of this particular home loan feature.

It’s important to note that interest is calculated daily. So, even if you use the offset account as your transactional/spending account, the funds in your account will always offset the interest payable on your home loan – regardless of how much is in there.

Consolidate your debt

Many households have personal or credit card debt in addition to their mortgage, which can be overwhelming and difficult to manage. Debt consolidation can be a good way to manage repayments and reduce the amount of interest you pay on your debt overall. There are several ways to consolidate debt and the right option for you will depend on your unique financial situation and goals.

One way to consolidate your debt is to streamline it into your mortgage. You can do this by refinancing into a new home loan with a more competitive interest rate therefore reducing the overall interest charges you have.

Should you decide to consolidate your debt and refinance into a new home loan you’ll likely increase the size of your mortgage, which may involve fees such as: discharge; early exit; application; settlement; valuation and more.

You should also consider that consolidating smaller loans into your home loan means you could be transferring a short term debt (like a credit card balance) into a long term loan (your home loan). Before taking this step, you should also consider the loan term, loan structure, the interest rate and the lender’s terms and conditions.

What to keep in mind

Debt consolidation should not be a quick fix strategy - as is the case with most sound investment strategies, you should take a long-term view. If you’re choosing to consolidate in order to manage your debt more easily, make a commitment to yourself to start good financial habits and stay on top of your repayments.

Debt consolidation can be a popular way to reduce the amount of interest you pay in the long-term but if you’re not consistent with your repayments once you’ve refinanced, you could end up extending the repayment term on the loan. Before refinancing you will need to determine whether the amount you will save in interest is more than the cost associated with setting up a new home loan.

If you need help deciding whether debt consolidation is the right solution for you, or you’re looking for other ways to manage your debt, please contact your local broker today.


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