Q: With a $325,000 mortgage at a variable rate of 5.2 per cent and three credit cards with debts of $9,000, I am drowning in paperwork and monthly repayments. What should I do?
A: Based on the debt you have described, you’re paying a minimum of around $2,100 monthly and would also be receiving lots of envelopes with windows each month. One way you could simplify things is through a disciplined debt consolidation program.
Debt consolidation involves folding or consolidating a number of different debts into a single loan that has a lower overall interest rate. The biggest advantage of this is the potential to enjoy savings on the monthly repayments, possibly cutting hundreds – even thousands of dollars from your overall interest bill.
There are other benefits as well. You could save on loan fees and charges because you only pay the costs for one loan instead of several sets of ongoing fees. You’ll also only need to make one monthly repayment and deal with one lender and one set of loan statements which should simplify things for you.
Consolidating debt into a home loan is pretty common, mostly because of the attractive interest rates. But it depends on your specific circumstances and for smaller debts a personal loan or a credit card transfer might even do the trick.
Using your example and making a few assumptions, if you consolidate your home loan with your credit cards (assuming you have enough equity in your property) your monthly repayments could fall by more than $100 each month.
But here’s the clincher. Split your credit card debt from your home loan so it’s on a shorter fixed term of say five or seven years. Then use the savings from your repayments to pay off that debt sooner. This is how you’ll get the most out of any debt consolidation plan.
Being disciplined and using savings to pay off your debt earlier will help you avoid one of the major pitfalls in debt consolidation – where you extend your debt over a 25 or 30 year mortgage term and end up paying more interest. That could turn a short term debt into a long term one so I can’t stress how important it is to keep it on a shorter term and pay it off as quickly as you can to enjoy the full benefits of consolidation. Chopping up or locking away your credit card also mightn’t be a bad idea if you’re tempted to load it up again!
I’m certainly no financial adviser and every situation is different, so if you think you’re spread too thinly or you’re struggling to stay on top of your bills and loans it’s smart to ask for help.
Get expert advice from a financial adviser who understands the full picture. An MFAA accredited mortgage broker can also provide you with useful information about different debt consolidation options. There’s no point suffering in silence when there just may be a better way!
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