Better manage your debt this year

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.

Local Mortgage Choice in Perth franchise General Manager, Ruth Hatherley said the results weren’t altogether surprising as it is common for people to worry about the state of their finances once the festive season finishes each year as it’s about now that we tally up the cost of presents, celebrations and holidays that have depleted our savings or increased our credit card debt.

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.

One of the most common and effective ways to manage and pay down an excessive amount of debt is to look at consolidating all of the debts into one area – like the mortgage.

Borrowers can speak to a broker about consolidating all of their debts – including personal loans, credit cards, car loans – into their home loan. This may be able to deliver borrowers with excellent savings, as they may 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 their broker about whether this is the right decision for their needs. This option works best when borrowers are prepared to knuckle down and make extra repayments on the new, enlarged home loan to ensure the interest paid is kept to a minimum and the loan is preferably on track to be paid before the end of the contracted loan term.

One of the other good 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.

Borrowers should avoid using things like high interest credit cards to help fund large purchases like a home, as they won’t be able to use the value of their home to pay off the credit card and the interest repayments can be very challenging to meet along with the new home loan as well. Similarly, it is a good idea to avoid taking out long term debt on short term assets – such as a 5 year personal loan for an older used car. If a borrower takes out a long term debt on a short term asset, their asset will become redundant before they have finished paying off the loan and they will lose all the potential equity in the asset for future sale purposes, which can mean that there is debt left over even if that asset is onsold.

If you would like learn more about your home loan or financial advice options, contact Mortgage Choice today.

Mortgage Choice
Suite 1, Level 1, Shafto Lane
876 Hay Street Perth
(08) 9485 0090


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