How Debt Consolidation Can Transform Your Finances

Credit cards are now a major source of personal financial debt in Australia. A recent report issued by ASIC indicated that one in six Australians are struggling under a mountain of debt that might never be repaid. 18.5% of consumers where said to be overwhelmed by their credit card debt load, with outstanding balances now totalling $45 billion!

Credit card debt can create a very nasty cycle for anyone trying to rid themselves of this sort of debt. Credit card issuers typically only require cardholders to pay off a very small minimum amount each month, typically 3% of the card limit. So take for example someone with a $6,000 credit card that is maxed out, with an interest rate of 15% on any outstanding balances. The card issuer will only require them to repay say 3% of the limit (i.e. $180) in any given month, and then will charge interest on the remainder ($6,000 x 15% = $75 per month). So in that instance, the cardholder has paid off $180 but incurred another $75 in interest, so the balance only reduces by $105 in that month. Clearly it would take years to repay this card paying only the minimum amount (often your credit card statement will indicate exactly how long).

So what’s this got to do with mortgage broking?

A good mortgage broker should be able to consider a debt consolidation strategy for you, particularly in instances where you have surplus equity in your home. That is, the value of your home far exceeds your existing home loan. Consolidating debt into your home loan can save you considerable amounts each month,transforming your cash flow, and ridding you of the burden of credit card debt.

Let’s consider a recent example I encountered.

John and Jane (no, not their real names)
Pre-tax incomes of $140k and $80k respectively
Existing home loan of $470k
Credit card debt of $39k
Needing $75k for home renovations

Prior to us helping them, John and Jane’s repayments each month were as follows:

Home Loan (on a very ordinary rate): $2,600 per month
Credit Cards: $1,300 per month
Total repayments of $3,900 per month, with credit card balances only reducing by minor amounts, due to the interest being charged on outstanding balances

So how did we assist John and Jane? We sourced a lender that was comfortable to consolidate the credit card debt, and provide cash out for the renovations. The lender we chose also offered a good rate, reasonable fees, and overall, met the needs of John and Jane. 

We then organised a loan for $580k, which refinanced the existing loan, paid out the credit cards in full, and provided John and Jane with $75k for the renovations they were keen to do.

Their payments? $2,683 per month.

Yes, that’s right. Only $83 a month more than their existing mortgage (and a whopping $1,217 per month LESS than their home loan and credit card repayments combined) to completely wipe out their credit cards, and provide them with the money they needed to complete their renovations.

It’s important to note that while the credit card debt is now at a much lower interest rate (the home loan rate), it is now spread over a 30 year period.However, the debt no longer accrues interest at an exorbitant rate, and the extra $ that John and Jane have available to them each month can be used to attack their mortgage, and aim for a faster repayment term.

Bear in mind that every situation is different, and advice needs to be tailored to your individual situation. Speak to us at BCV to see how we can assist with your debt consolidation strategy.

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