Debt is a fact of life, and it’s growing. Many New Zealand families struggle to make ends meet because of their various debts. Credit card debt in particular can build quickly when the bills must be paid, and the cost is crippling, ongoing and stressful. Juggling those different debts can also be a problem, with the danger of forgetting one or more, so you incur penalties on top of it all.

One way to manage this problem is by consolidating your various debts. That is, taking all those high-interest credit lines – hire purchase, personal loans, vehicle loans, credit cards – and paying them off through one, lower-interest loan. This will only work for you if your debts aren’t too high in total, your credit is still good enough to secure that lower-interest loan, and crucially, you don’t take on any more debt.

Putting all your debts into one loan, at a lower interest rate, allows you to pay it off faster and more simply. No danger of forgetting or defaulting on various payments, and the lower interest means clearing that debt will cost a lot less overall.

There’s a catch

Once you’ve organised all your debts into one loan, you might think your problems are over. They’re not, unless you take a good look at your household budget and make some changes to the way you spend your income. If you’re so mired in debt that you can’t even meet the payments of a lower-interest loan, then you should probably seek expert help to work out what to do.

Your options

There are three ways you can move all your debts into one simple loan with a single payment. Interest rates will vary from lender to lender, as will the term of the loan.

A balance-transfer credit card

Look out for a 0% offer (some time interest-free), and if you qualify, you can transfer all your debts onto it. Do your best to pay off the balance before the 0% time expires. If there aren’t any 0% offers to be had, go for a low-interest option (6.99% if you’re lucky), and you’ll still save a lot on interest payments.

A personal loan on a fixed rate

The advantage of a personal loan is that it has a lower interest rate than credit or store cards, and you can probably pay more than required without incurring a penalty, getting rid of your debt more quickly.

Top up your mortgage

This is your best option if you own your home. Mortgage interest rates are very low right now, and topping up your mortgage to pay off all those expensive credit lines will save you thousands in interest.

How a mortgage top-up is managed

Depending on how much equity you have in your house – that is, what your home is worth, how much you initially borrowed, and how much you’ve already paid off – you can use your mortgage to pay off other debts. You do that by leveraging your equity to top up the existing mortgage, as long as you can make the payments.

You can also change the structure of your mortgage, to allow you to pay it off faster when you can afford it, or to keep your payments the same through a longer-term.

For example, you may have $10,000 owing across credit cards and hire purchases, paying it back at $350 a month. If you’re paying an average of 20% pa on that debt, it will take you over three years to pay it back, and you’ll end up spending $3600 in interest – that makes the sale item you snapped up far more expensive than you thought! By moving the debt to your mortgage, you’ll pay much lower interest rates – say 4.5%. By continuing to make the same payments, you’ll save a whopping $3100 in interest and be debt-free over a year earlier – well worth doing!

Consult an expert

Before you take any consolidating steps or make changes to your mortgage, talk to a mortgage broker first. Any time you make changes like these, there will be fees attached, and your bank will demand a three-month financial history from you. A broker can take a good look at your situation, explain your options and make sense of the lender’s demands. That way, you can take the steps that are best for your situation.

Check your spending

Once you’ve got those debts consolidated, your one big mortgage debt is secured against your home. That means you need to pay on time or you’ll be penalised. To do that, you’ll also need to check your spending, and avoid taking on any more debt. Your next step is to look at your household outgoings, and make a budget to take control.

Don’t stress – consolidate

It’s worrying and stressful to be in debt. It’s worse when you’re juggling multiple debts, trying to keep them all from grinding you down.

You don’t have to live like that – there are ways to consolidate all those debts into one place, whether it’s a personal loan, a lower-interest credit card or a top-up on your mortgage. If you’re a homeowner, your mortgage is the best option not only to consolidate and pay off more expensive debt, but to be charged a lot less interest on what’s left. You can also reorganise your mortgage at the same time, so that one part is fixed, and the rest is floating. That way, you can pay down debt even faster.

Talk to a broker for the best advice on your financial position, and how you can make your mortgage work for you. Meanwhile, take steps to rein in your spending so you don’t find yourself in the same dire situation down the track.
Want advice about topping up your mortgage to consolidate debt? Talk to Global Finance today