In Australia, we have become a lot more conservative when it comes to debt. We are living with lower levels of debt and are now looking for ways to become debt-free faster.
So how is this possible when you are living with a mortgage?
Many people are looking at an offset account and how this can benefit them. An offset account is an account that is linked to your mortgage and instead of earning interest on your savings deposit, the funds are used to offset the loan amount.
Your loan repayments will typically remain the same, but more of it is used to pay off the principal thus reducing the life of your loan and the overall amount of interest paid will also decrease.
Is an offset account for me?
The principal of an offset account is to have savings and to make these savings work for you. If you don’t have any savings, then there is little value in this type of account. If you have your salary paid directly in to your account and then use things like your credit card with 55 days interest free, you will really start to see the benefits of having an offset account.
What else do I need to consider?
If you are prone to over spending or living beyond your means, then something like an offset account may compound this problem. You should talk with one of our brokers who can work through some simple scenarios that help establish if this type of account is right for you.
In this day and age it is very easy to find yourself in a position where you have a lot of personal debt from things like credit cards, car loans, store cards and personal loans. These can all start out as being easy to manage but over time we can slowly increase the amounts owing, the card limits and before we know it, we are financially crippled by the repayments. So what is the answer?
Refinancing
If you have some equity in your home, consolidating all of your debts in to your home loan can offer some significant advantages but you should proceed with caution.
It is really important that you go through all of your debts and write down the following:
- Amount owing
- Interest rate
- Minimum monthly repayment
This will give you a very clear picture of your current debt situation. I know this can be a scary task to undertake but remember – knowledge is power!
Once you understand what you have outstanding, I can help you with your consolidation. If you decide to roll all of your debts in to your home loan, you will see several benefits from this. Firstly, the interest you are paying on your home loan is much lower than personal debt and therefore the amount of interest you will be paying is much less. However, you are paying this over the life of your loan rather than in the short term. Further, you will only have to manage one repayment a month rather than multiple repayments and this will reduce how much you are having to pay.
A word of caution though. If you are serious about getting rid of your personal debt, you must commit to changing your current lifestyle. You should consider getting rid of or reducing the limit on your credit cards. You should also consider using what you would have been making as monthly repayments in the past as a means of making additional repayments on your mortgage so that you get ahead and work on reducing the additional debt that you added to it.