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How To Build Wealth While Dealing With Debt

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By: Tony Xia– director of The Mortgage Agency based in Sydney.

If you feel like your credit cards and other debts have you in a chokehold with no room for air, you can breathe easy knowing that you have a few lifelines.

What’s more, you can actually increase your wealth whilst still paying off your debt.

Here are some strategies you can employ to maximise your savings, minimise your debt, and begin growing your wealth.

How Debt Consolidation Can Help

The debt consolidation loan strategy works by calculating how much money is required to pay off your debts in full, including any penalties for early repayments.

Then, you take out a personal loan for that amount only and pay off all your debts.

Consoling all your debts into one single personal loan can come with many benefits:

  • Your debts are all housed in one place, so you only have to worry about one payment to one lender. You know precisely how much the amount will be, so you can plan and budget for it appropriately.
  • You have a clear repayment schedule, rather than numerous accounts going off at different times for different amounts. Managing your finances can be much easier when you only have one payment scheduled.
  • There is an endpoint in sight. When you have different cards credit cards and loan terms, it can feel like you’re never going to be out of debt and become despondent. When you have an end goal, you can work towards it slowly and steadily.
  • If you’re not managing your total monthly repayments, you can structure your personal loan over an extended period and reduce your repayment amount. While this will likely result in more money spent in the long run because of interest, it can provide immediate financial relief to get you back on your feet.

Why Debt Snowballing Can Be Effective

If you don’t want to take out any more loans, the debt snowballing method can be an effective option.

This method takes the smallest debt you have and focuses all your energy on repaying that debt early while still servicing your other debts as required.

Focusing on one thing at a time can help you stay on track and maintain motivation, especially when it’s a small amount and can be paid off relatively quickly with a few extra repayments and cash injections.

The victory of paying off one loan will translate onto the next until you only have a few more long-term loans remaining, such as a car, a mortgage or a tertiary education loan.

Is Refinancing a Good Option?

If interest rates have gone down since you took out your mortgage and you’re stuck with a fixed rate home loan, you can benefit from the lower interest rate by refinancing your home loan to a variable rate mortgage.

Keep in mind that there can be two disadvantages of refinancing to a variable mortgage:

  • Refinancing your home loan costs money. Although you can benefit from a lower interest rate, consider whether it’s worth the cost of refinancing.
  • Variable-rate home loans can be volatile. If interest rates increase, you could land up paying even more money than you were initially.

But, the other benefit of having a variable rate home loan is that you have the option of linking an offset account.

Why an Offset Account Can Save You Money

An offset account is a transactional account linked to your home loan. The money in your offset account is offset against the balance of your home loan, and you are only charged interest on that.

So, the more money you have in your offset account, the smaller the interest on your mortgage will be.

If you have any savings, it’s a good idea to keep them housed in your offset account.

You can request your employer deposit your salary into your offset account every month. An offset account is transactional, so you can still use the money when and how you’d like. The key to an offset account is keeping the balance as high as possible for as long as possible.

How To Create “Good Debt”

“Good debt” refers to investing in assets that will increase in value, and the loan interest is often tax-deductible. The income generated from these assets can be used to service their debt.

Once you have paid off enough of your mortgage, you can access your property’s equity. This money can be used to put down a deposit on a home loan for an investment property.

Or, if you continue putting savings into your offset account, you could use that money towards a deposit.

In both of these instances, you still have the debt of your mortgage to repay, and you may have other debts you’re busy paying back, too. But you’re creating wealth simultaneously.

Key Takeaways

Being wise about how you repay your debts is important to maintain a good credit score so that lenders are in good faith to approve your future home loan applications.

If you’re struggling to manage multiple debts, consider a debt reduction strategy such as debt consolidation or debt snowballing. The sooner you’re able to get your loan repayments under control without defaulting on any, the better.

Refinancing your home can result in lower repayments if interest rates are lower. And, if you set up an offset account, you can continue paying your previous mortgage amount, and the excess will be offset against the balance of your home loan to reduce the interest.

You can use an offset account as a savings account, and the more money you deposit, the more interest you’ll be saving on your home loan.

Once you have all of your debts under control, you can focus on creating “good debt”. You can use the equity from your home or the funds in your offset account towards a deposit on investment property and begin your journey to wealth creation.

Author: Tony Xia

Tony is the director of The Mortgage Agency based in Sydney. He is specialising in a holistic approach to home loans to help the clients with getting the right outcome based on their specific financial circumstances.

www.gawdo.com

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