How do I consolidate my debts?

Finance Feb 14, 2020

7 min read

debt to income ratio
debt to income ratio

It’s a thought that wakes Australians in the middle of the night. Staring at the ceiling, they worry: “How can I reduce my debt?” 

In the first quarter of every year, Entourage Finance’s team routinely develops strategies for clients who want to get their debts under control. A new plan for the new year. 

Recently, Entourage Finance partner Vincent Moore eased the mental and financial stress of a couple aged in their 40s who built up debt in parenthood. 

The credit cards were an easy and available option to deal with the procession of living costs – everything from medical appointments and ‘onesies’ through to utilities bills and groceries. 

And there were personal loans and car loans on top of that, weighing down their efforts to chip away at their mortgage. 

Good debts vs bad debts 

You’ve likely heard your parents banging on about ‘good debts versus bad debts’. 

It sounds a bit weird: when would shelling out your ‘hard-earned’ in interest repayments ever be deemed a ‘good’ thing? 

But, in general, good debts are tied to securities which can accrue value or returns, such as loans for property or education. 

Bad debts are associated with loans for purposes that hold little financial value or may depreciate in value – think a holiday or car. 

With Vincent’s clients, there were too many had debts: credit cards, personal and car loans. So, Vincent tried to reduce the impact of the bad debts through consolidating them within their existing home mortgage. 

The interest rates on mortgages are typically lower than other loan vehicles. As the securities are typically higher in value, these loans take longer to repay. Lenders therefore price home loans at more competitive rates as the life of a mortgage is longer than a personal loan and other similar products. 

Proven ability to make payments 

“When you’re fronting up to a lender on behalf of a client, you need to be able to rely on the proven performance of your applicants,” said Vincent. 

“If there’s a litany of missed repayments, that’s an immediate red flag and could prevent the discussion from progressing further. 

“In this instance, the applicants had always met their home loan repayments and met the majority of their credit card payments, bar one. 

“Their track record, therefore, made our proposal logical in its plan, and plausible in its delivery.”  

The Entourage Finance proposal 

In this case, the applicants owed: 

  • $31,754 on a personal loan; 
  • $13,973 on a car loan; 
  • $5,481 across two credit cards. 

With both applicants now back in the workforce, they have a gross household income of around $160,000 per annum. 

Entourage Finance proposed rolling these debts – which were tied to interest rates of betwee6% and 20% – into their variable mortgage, which was 3.38%. 

The applicants owed $582,330 on their mortgage. By consolidating the personal debts within the mortgage, the new base loan agreed with the lender became $633,600. 

Through refinancing and debt consolidation, Entourage Finance reduced the monthly repayments for the applicants on their personal debts from $1,557 to around $225. 

While the balance of their home loan has increased, the clients are saving around $20,000 a year in debt repayments which they’re now using to pay down their home loan. 

Why consolidate in the current market? 

Vincent said: “As the Reserve Bank of Australia sent the variable mortgage rate to its lowest ever point, we’ve seen a growing number of people with multiple financial obligations come to us, saying: ‘How do I consolidate my debts?’ 

“These recent clients were really stressed with their personal debts. Their focus was on trying to meet the high interest rate repayments. 

“Now, they’re able to make financial plans which includes chipping away at their mortgage – something they’ve been unable to do over the last couple of years.” 

How can I do the same? 

In the finance industry, relationships are key. As finance brokers, the team at Entourage Finance deals with lenders on a daily basis making our specialists well placed to: 

  • know which lenders best support debt consolidation; 
  • negotiate the best outcomes; 
  • develop strategies that set clients up for financial sustainability. 

At Entourage Finance, we can show clients how to pay down their debts once repayments become manageable. Paying down the debt faster avoids the chance of debt accruing on home loans over long term periods ie 30 years. It’s about putting our clients in a better position for the long-run. 

So, if getting control of your debts is part of your 2020 ideals, contact the team at Entourage Finance today!