reduce debt- credit cards- mortgage- leasing- loans

Justin Power

The is one simple but incredibly effective step you can take to dramatically increase your wealth. It?s a step, which, for a typical family, could mean anything from ?100 to ?2,000 or even more, tax-free, to spend or save every month. Interested? All it involves is reviewing your loans ? mortgage, bank borrowing, leasing, credit cards and other debts ? and re-organising them so that you pay the lowest amount of interest and repayment. This may not sound a very worthwhile activity so let me start with a real-life example.

The Pattersons are in a good financial position with two incomes and plenty of equity in their home. Before taking action their borrowings were as follows:

Type of loan Remaining term Rate Amount Monthly cost

Mortgage 18 yrs (25yr term) 4.03% ? 234K ? 1239.02

Home improvement 4 yrs (5 yr term) 8.5% ? 18K ? 369.30

Car loan 2 yrs (4 yr term) 7.5% ? 20K ? 483.58

Credit Card 1 N/A 16.9% ? 6K ? 300.00

Credit Card 2 N/A 10% ? 4K ? 200.00

Store Card N/A 23% ? 8K ? 400.00

Although they could well afford the total cost of their loan repayments ? a staggering ? 2991.90 a month ? they were paying much more than they needed to for their borrowing. They decided to consolidate ? in other words, move all their debt (? 290,000) to a single lender ? and thus benefit from a considerably lower rate of interest. In fact, as they own their own home, they were able to find them a new mortgage at just 3.5% a year ? only 1% over the European Central Bank rate. This gave the Pattersons two choices. They could carry on paying the same amount each month. The advantage of this would be that their mortgage (and all their other debts) would be paid off sooner ? in just under 10 years ? and also that they would save a staggering ? 115,217 in interest. Or they could take advantage of the lower interest rate they had negotiated to cut their monthly payments to just ? 1451.81 ? a
reduction of ? 1540.09 ! However, if they decided to go for an interest only
loan ( repaying the full amount at the end of the term or by lump sum
reductions at no penalty costs during the term) their repayment at the same
interest rate would be down to just ? 845.83 per month ! The Pattersons
went for the ?1451.81 monthly payment and decided to invest the difference in bonds. As a result they are looking forward to receiving a lump sum in excess of ?180,000 the same year they pay their mortgage off and will be free to pursue other, exciting investment opportunities.

Should you be following the Pattersons? example and thinking of
consolidating your debt? If you have a variety of loans at different rates
then it could save you a great deal of money. However, consolidating loans
in with your mortgage should be an once-in-a-lifetime strategy. This is
because what you are doing is converting short-term, expensive debt to
long-term, inexpensive debt. If you repeat the process then what you will
gain in lower interest rates, you will lose in a longer repayment term.
Consolidation requires discipline, too. You?ll be no better off if you
replace one set of high interest loans with another, or if you don?t use
your monthly ?saving? to good purpose.

Whether or not you consolidate, it goes without saying that you should
review your level of indebtedness on a regular basis. In particular, you
should:

- Check that you have the most competitive mortgage rate
available. If you save just 0.5% a year over the term of a 25 year,
?250K home loan, it will be worth a staggering ? 20,409 to you.
- Avoid borrowing money on credit cards or store cards. I have seen interest rates as high as 23%. If you use ?plastic?, pay the balance off each month and don?t fall into the ?minimum payment? trap. If you make the minimum monthly payment on a ? 1,000 balance at 17% it will take you 11 years to pay off the debt and cost you a staggering
?1,870 in interest alone.

- Never borrow to pay for living expenses or ?lifestyle?.

If you don?t want to consolidate using a mortgage ? but you do want to
reduce your debts ? then you can adopt what I call the ?sniper? approach.
This involves picking off your debts one at a time, starting with the most
expensive. At the same time, you should move your borrowing to where it will cost you least.

Attitudes to debt have changed considerably over the last few decades.
Greater wealth, greater competition in the financial services sector and a
period of stable, relatively low interest rates have all resulted in an
explosion in consumer borrowing. This in itself is no bad thing. It makes
excellent sense to borrow money for such purposes as buying a home, funding an education or making a major purchase or investment. It may also make excellent sense to borrow money and re-invest at a higher return. This
column is all about making money. One of the best ways to do this is to make sure you aren?t wasting your cash on expensive or unnecessary debt. If you want assistance in this area then you should consult your professional
financial adviser.

Posted in Mortgage