Debt. Something that most of us have, but few of us like to think about. Rather than ignore it, it is important to review your situation regularly and have a strategy in place to keep it under control. Everyone wants to be debt free – so here are 6 suggestions on how to get there faster.
1. Create a realistic budget and stick to it
Everyone knows this one – but few people do it. Developing a budget that tracks your income and expenses is crucial to reducing your debt as quickly as possible. It will allow you to discover how much money you have left over to put towards repaying your debt faster. It also allows you to acknowledge your expenses and potentially get rid of some unnecessary items or save money in other areas. There are plenty of templates on the internet and apps around to help you get started.
2. Pay more than the minimum
Not only will this save you bucket loads of money in interest expense, but it will also reduce the term of your loan. Throwing any excess cash (such as your tax return refund, selling a car or an inheritance) at your debt rather than “treating yourself” will get you closer to that debt free goal.
3. Consolidate your debts
Investigate whether you have sufficient equity in your property to consolidate your more expensive debts (credit cards, personal loans) within your home loan. This means that instead of paying 15%-20% interest on your credit cards, you can transfer these debts to your home loan and pay it off at a much lower rate. If you don’t have the capacity to consolidate other debts into your home loan, then we suggest attacking the debts with the highest interest rates first.
4. Split your home loan
We often worry about interest rate movements, but don’t want to be locked into a fixed loan as they are inflexible. A good compromise to to split your loan – this allows you to have a portion fixed and the rest variable. You can take comfort in the fact that the repayments on your fixed loan wont change, and you can take advantage of the more flexible variable portion with increased repayments, lump sum payments and features such as offset accounts and redraw.
5. Run an offset account attached to your home loan
Any money sitting in an offset account will save you on your interest repayments. Instead of the money in an offset account earning interest, it works to offset the interest you are paying on your home loan. If you have some savings tucked away for your next holiday or as an emergency fund, they may be much better off sitting in an offset account and saving you interest on your home loan rather than earning a small amount of interest on a savings account.
6. Stay informed & do an annual health check of your home loan
It is easy to just let your mortgage just roll along as it is such a long term commitment. Most people just make the minimum repayments when they fall due and try and ignore the finer details. With new products coming on the market all the time, as well as changes in interest rates, it makes sense to do an annual health check on your home loan to ensure you are on the best possible rate and product for your situation. Your bank wont give you an impartial opinion on what is the best option for you – instead speak to a mortgage broker who can assist with this. A good mortgage broker will do all of the running around and research for you and determine whether your current loan is still the best one for you or whether you can save money by considering other options. And best of all, most mortgage brokers do not charge a fee for this service, so there is no cost to you!