Better manage your debt this New Year

Monica van Riet reveals secrets to successful debt management.

New data shows a majority of Australians are ‘worried’ about their financial situation.

According to the findings of Mortgage Choice’s inaugural Financial Confidence Survey, 52.4% of Australians consider themselves to be either ‘very worried’ or ‘concerned’ about their finances.

Australians are always more stressed about money during the holiday season as they know it is an expensive time of year with presents to buy, lunches to host and various social events to attend.  They don’t want to be told to reign in their spending during the festive season and, the reality is, they shouldn’t have to.

Instead, Australians should use the New Year as a perfect opportunity to re-evaluate their financial situation and make paying off excess debt and debt management a priority.

There are a couple of things Australians can do to better manage their debt and pay off any debt they have accrued quickly and painlessly:

1. Take the time to review your financial situation. By knowing what debt you have and the interest rates you are being charged, you can put together a plan of attack.

2. Consolidate all debts such as personal loans, credit cards, and car loans into one loan, such as your home loan. This may be able to deliver excellent savings, as you ultimately pay less in interest.

For example, say a borrower owes $20,000 on their credit card with an interest rate of 25%. If they make $500 repayments each month, by the time they have paid off their credit card, they will have paid more than $23,000 in interest.

Now, if the borrower consolidated that $20,000 debt into their 30-year, 4.2%p.a home loan, and continued to make the $500 monthly repayments, they will have paid off the $20,000 debt in half the time and paid just over $1,500 in interest – saving more than $20,000 in interest.

But while debt consolidation can deliver worthwhile savings, it is important for borrowers to speak with us, your broker, about whether this is the right decision for your needs.

A key downside of consolidation is that a borrower could turn a short term debt like a personal loan into a longer term debt. That means paying interest for a far longer period, and over time you could end up paying more in total interest charges. For this reason, consolidation works best if borrowers are prepared to knuckle down and make extra repayments on the new, enlarged home loan.

3. Another simple but effective debt management technique is debt rollover.

If a borrower owes a lot of money on one particular credit card, they may be able to speak to their lender about obtaining another credit card with a 0% interest rate for the first 12 months and then roll their other debt onto the new credit card.

That way, any minimum monthly mortgage repayments will go towards paying off the principal debt, not debt and interest. For this technique to work effectively though, the borrower needs to be committed to paying off their credit card in full by the end of the 0% interest period.

If they keep putting additional expenses onto the card without paying it off in full, they can get themselves into a very bad debt cycle.

4. Finally, one of the best ways to manage debt in 2016 is to match assets with liabilities.

In finance, one of the cardinal rules is to match your assets with your liabilities. In other words, it is important to avoid using short term debt to finance a long-term asset and vice versa.

Avoid using a credit card to fund a home purchase as you won’t be able to use the value of your home to pay off the credit card. Similarly, it is a good idea to avoid taking out long term debt on short term assets – such as a 5 year personal loan on a used car. If you take out a long term debt on a short term asset, your asset will become redundant before you have finished paying off the loan.

If you would like learn more about your home loan or financial advice options, call us on 03 9681 8182, or email monica.vanriet@mortgagechoice.com.au or paul.williams@mortgagechoice.com.au.

Posted in: Tips

Contact us today.


Additional Comments? * :