Debt is a part of life nowadays, but can easily can get out of hand – it only takes reduced working hours or interest rate hikes to start falling behind. There are different types of debt – the good, the bad and the downright ugly!
Home and investment loans are the most common type of good debt because over time, the asset grows in value and potentially can start providing you with an income through a positively geared investment.
Credit cards – the most common bad debt. With interest rates from 12% to 20% or more, it’s easy to let credit card balances get out of hand. Making minimum payments means you never really clear the debt but simply pay the interest over and over again.
Car loans – these can attract a high rate of interest along with a depreciating asset.
Personal loans for consumables, holidays – may be one of life’s necessities but it’s money and interest paid on something with no monetary value.
Pay day loans – the worst form of debt with interest rates into the thousands of percentages – a very scary debt indeed!
BEWARE OF QUICK FIXES
It can be tempting to refinance credit card debt and personal loans into your home loan, which at times can work out, however I’d strongly suggest to calculate what this means in the loan term. For example, a personal loan of $15,000 at 15% over five years will attract less interest than $15,000 at 4% over a 30 year term. Clear debts with a higher rate of interest, for example, credit cards and car loans first.
Take responsibility and learn from your mistakes. Sit down and understand your income versus expenses. Work out a realistic budget and stick to it! There are a number of budgeting tools you can use to get your finances back on track.
With the Reserve Bank of Australia cash rate at rock bottom, now is the time to get ahead with your home loan. I would recommend:
Overpayments – most if not all variable rate loans allow you to make overpayments on your loan. The advantage of this is that you allow yourself to get ahead of your mortgage, which over time will take years off your mortgage.
Offset and redraw accounts – most if not all variable rate loans allow you to make overpayments on your loan. The advantage of this is that you allow yourself to get ahead of your mortgage, which overtime will take years off your mortgage and possibly save you thousands in interest. Call your mortgage broker to ask what your repayments would be on a 20 year term instead of the standard 30 year term.
Renegotiating with your current lender – many of my clients are taken back when they realise their bank offers better deals for new borrowers. Many borrowers are also afraid to ask for discounts on their home loan. With the mortgage market so competitive at the moment, lenders are bending over backwards to keep existing deals. Speak with your local mortgage professional in order to discuss your individual circumstances.