How to manage your debt hangover in 2016

January 04, 2016
Steve Sims

As the New Year begins are you starting to feel the unpleasant effects of a debt hangover?

Here are our 5 tips from our home loan experts guaranteed to help pay off your debt faster.

1. Pay off loans that charge a higher interest rate first

If you’ve accumulated multiple credit cards consider paying off the smaller ones first and close each card as you go. Each card closed is a major achievement and can help you to reach your next goal.

2. Consolidate your loans

Consider using your home loan to convert all your individual loans into one loan, ideally at a lower interest rate. Home loans have a long repayment period (up to 30 years) and have lower interest rates than personal loans or credit cards, so repayments are lower.

Now that you’ve freed up some cash flow, why not get into the habit of paying a bit extra on your weekly or fortnightly repayments. Switching your monthly repayment to fortnightly can make a significant difference to your loan term and the interest paid over the life of the loan. There are 26 fortnights in one calendar year, so by paying fortnightly you make the equivalent of 13 monthly repayments during the year.

3.  Use an offset account

Offset accounts allow borrowers to reduce their loan amount, for the purposes of interest rate calculations, by an amount equal to whatever savings they have. 

A home loan balance of $300,000 with $10,000 in an offset will only incur interest on $290,000. Arrange to have your salary and other income paid to your loan offset account and pay ongoing expenses on a credit card with an interest free period. Repay your credit card in full monthly using your offset account.

Simply changing the way you manage your cash flow can significantly reduce your interest expense without having a large sum of savings to make the offset work in your favour.

The power of an offset account is the way savings snowball over time. In the early days of a loan it may not seem its making any difference but it will have a massive effect over the life of the loan, as the borrower is paying off a larger amount off the principal, instead of interest.

One of the biggest advantages of an offset account is that the money is still readily available to the borrower if needed.

4.  Use redraw facilities

For those who aren’t financially disciplined enough to save a large sum in an easy accessible offset account and leave it there, there is an alternative. Look at a basic home loan product with redraw (not offset) available. You can deposit your savings directly into your loan and reduce the interest that you pay. You can redraw the funds in the future if the need arises.

Keep in mind that some banks will charge you small fees for redrawing cash, so look for a lender who offers free and unlimited redraw facilities.

5. Reduce your overheads - Investors

Property investment can be likened to running a business. There are many ongoing overheads. It’s important for investors to keep everything in good order by regularly looking at ways to trim costs.

You may be able to negotiate a discount on property management fees. Setting time aside to call multiple insurance companies may end up saving you premiums. If you then put savings into owner occupier home loan repayments this could have a big impact over the life of your loans.

If you can save $20 a week by trimming overheads and pay that extra savings onto your home loan, that would add up to more than $35,426 in saved interest for a $300,000 loan, over a 30 year term (based on an interest rate of 5%).

Mortgage Choice is here to help

Let us do a FREE home loan health check to help you to pay off your debt faster and get the right home loan for your needs.

With a choice of 26 lenders, to find out more call Steve on 0433 124 081, Nathan on 0433 259 433 or the office today on (08) 6144 3230. 

Posted in: Tips

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