Managing debt

Hardly a week goes by that we don’t hear of another hard-luck story from someone who has ended up in a financial mud pool because they did not follow some pretty basic rules about money. Anne from Auckland is determined not to end up in that mud pool and has asked for some tips about reducing debt.

The general principle is to repay as much as you can as often as you can. Even small increases in mortgage repayments will add up to savings of many thousands of dollars in interest in the long run. Interest rates are low at present, but they won’t always stay this low. Invest the interest rate savings back into your mortgage so you will be in a better position to deal with the interest rate rise when it happens.

Here are some other tips.
• Use windfall gains to make lump sum repayments (e.g. an inheritance, the sale of a second vehicle, an unused boat or caravan, etc).

• Hold an annual garage sale. Use the proceeds for a lump sum mortgage repayment.

• Have a coin tin. If you are collecting coins at a rate of $20 a month, use this to increase the repayments.

• Take in a flatmate or boarder if you have a spare room, or rent out a garage or yard area to those looking to park a car, boat, or caravan.

• Take on a part-time job with all of that income going into mortgage repayment.

• If you have credit card debt switch the balance to another credit card company that offers 12 months interest free on a balance transfer. Use that time to clear the debt.

• Cut living costs by growing your own fruit and veges, and review all of your living costs to see the areas where savings can be made. Most families can cut 15% off their annual spending without even noticing it. The most obvious areas are cutting down on the vices – like smoking, booze, partying, fast and furious cars, and takeaways!

• If you are locked into a fixed rate loan that you would like to repay but don’t want to pay break fees (early repayment fees), all is not lost. Most banks allow part repayment of a loan without penalty. One reader from Whangarei had two fixed rate mortgages that had some time to go before coming off the fixed rate. Repaying the loan early would have cost many thousand of dollars on early repayment fees, but the bank did allow them to increase their monthly principal repayments by $1,000 on each mortgage without incurring any penalties at all. In fact they could have repaid $24,000 a year without getting stung with break fees.

• If you are refinancing or entering into a new mortgage, shop around for the best deal. Banks have plenty of money to lend at the moment and they are keen to lend it to you. Typically, trading banks add a margin of about 2% to the cost of their money and in today’s competitive market most will shave something off their black board rate to get your business.

• Most cities have a free budget advisory service. They will give an unbiased opinion about financial contracts. If in doubt, give them a call – they are there to help.

• If you have debt like hire purchase finance or credit card debts and a mortgage, look at the possibility of consolidating all of the debt into a single mortgage. Mortgage debt is cheaper because it offers more security for the lender.

• Avoid hire purchase. The Retirement Commission refers to this as “dumb-debt”, and it is. Buying private cars on HP is really-dumb-debt, and borrowing to buy things like furniture, clothes, and holidays is madness. It is bad enough that these things lose value. Don’t add to your problems by paying interest as well.

• If you use a credit card, and many people are nowadays to collect reward points, make sure you make prepayments in full and on time.

• Don’t guarantee other people’s debts. We continually hear about people who are losing their homes because they have guaranteed someone else’s loan. Often the guarantor is a parent thinking they are doing the right thing for a son or daughter. It’s not the right thing to do.