Do you have a number of loans with differing terms and interest rate charges? If you do, it might pay to consolidate them all into one loan (usually your mortgage because it usually has the cheapest interest).
Here’s an example to illustrate one possible scenario.
Let’s say a client has three loans as shown in Table 1:
|Table 1:||Amount||Interest & Term||Monthly Repayment|
|Car Loan||$35,000||13% for 5 yrs||$797|
|Mortgage||$300,000||5.8% for 30 yrs||$1,760|
Depending on their relevant circumstances, we might advise and help this person to:
- Find a home loan with a lower interest rate and fees
- Consolidate the entire $360,000 as a home loan (if their home value provides them with equity to borrow against for the extra $60,000)
- Pay off their expensive debt represented by the car loan & credit card.
If they were able to consolidate their debts, their monthly repayments would be $1,213 per month less, as shown in Table 2.
|Table 2:||Amount||Interest & Term||Monthly Repayment|
|Home Loan||$360,000||4.0% for 30 years||$1,719|
A trap many people fall into is to allow the $1,213 saving per month to become spending money. As a result, the $60,000 they have borrowed for the car loan and credit card will now be paid off over 30 years and they will pay interest on that of $43,122. The solution is to maintain the repayments of $2,932 per month they had originally. This strategy ensures they quickly pay off the portion of the increased home loan that relates to the previous car and credit card debt. This also gets them ahead on the rest of the new loan.
If they maintain the extra repayments of $2,932 per month, they will pay off the $360,000 home loan in just 13 years… and save $154,930 in interest repayments, when compared to paying off the loan at the required $1,719 per month, as shown in Chart 1.
Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in July 2016. © Copyright 2016