6 Tips For Getting On Top Of A Debt Mountain

What To Do When You’re Swimming In Debt – The Top 6 Tips.

Here at The First Home Buyer’s Club, we get excited about helping first home buyers through the process of purchasing their first home.  But often, this excitement is hit with a dose of reality when we discover the amount of debt they have on board.

Debt is one of the biggest roadblocks we encounter when trying to help first home buyers along the journey.

Why Is Debt Such A Problem?

When the bank looks at providing a pre-approval, there are a few moving parts they consider when deciding whether to give you a ‘Yes’.

These are; deposit amount from KiwiSaver and savings, combined household income, and debt.  Often we find the first two parts look promising, but if we uncover any debt, we have to re-adjust our sights.

Banks look at debt as a negative because it takes away from your ability to pay your mortgage.  Therefore, when assessing your loan application for approval, they factor in any debt repayments you’ll have to make.  This ultimately reduces the amount you are able to borrow for buying your home.

The Effect Of Debt On Your Borrowing Power.

While it might seem easier to bury your head and ignore the problem, let’s for a moment consider the calculation example below to show how debt affects your lending ability. $10,000 on a personal or bank loan will have the effect of reducing your borrowing amount by $53,000.  $10,000 of credit card debt has the effect of reducing potential borrowing by $46,000.

Taking Steps To Reduce Your Debt

Now that you’re armed with the motivation to get on top of your debt, here are our six tips to do it.

1. Create a budget that includes a weekly debt repayment

If you are serious about buying your first home, a budget should be an essential part of your plan.  A budget can be used to get a repayment plan on track and once you’re at zero debt, these payments can become contributions to your deposit.

Creating a budget may seem tedious, so luckily there are some great tools out there to help you.  There is Pocketsmith, an App that acts as your financial assistant.  Sorted.org also has a great budgeting tool that allows your spending to be tracked.

The key part of budgeting is to include a weekly amount for debt repayment.  The payment should be a manageable amount however if you are prepared to make some sacrifices, an increase in this repayment amount can have a larger impact.  Remember – be sure to set your repayments up as an automatic payment, so it is set and forget.

2. Prioritise the debt with the highest interest rate or smallest debt.

If you’ve got debts of various types (credit card, personal loan, hire purchase), a good way of getting them paid off is to prioritise them in order for focused repayments.  There are two suggested ways of doing this.  The first option is to prioritise the debt with the highest interest rate.  The benefit of this is to minimise the total interest cost by shortening the length of time it is accruing interest.  The second way is to focus on the smallest debt which helps to get the ball rolling on your debt repayment and encourages you as you tick one debt off the list.

3. Contribute any additional cash to debt repayment

From time to time we come into some unexpected money, be it a work bonus or a tax refund.  While the temptation is to spend it, try to keep your eye on the ultimate goal and use it to get rid of that debt quicker.

4. Make Efforts To Change Spending Behaviour.

Getting on top of your debt is really only going to truly work with a committed effort to change the behaviours that got you into debt.  Did you buy a new car on finance?  A better approach is to re-adjust your sights to a car you can afford to buy, from money saved.  Paying cash will also give you the opportunity to negotiate on price, as well as avoiding ongoing payments for an asset that is losing value.

If you’ve got credit cards that you struggle to avoid maxing out, you should cancel them to avoid your credit repayments being wasted.

5. Reduce Your Credit Card Limit

If canceling your cards really isn’t an option, then reducing their limits will still have a positive effect on your ability to borrow from the Banks.

Reducing your credit card limits has two effects; firstly reducing your “available” funds to curb extra spending. Secondly, the bank looks at your card limit as a worst-case scenario.

So even if you only have a balance of $5,000 of a $10,000 credit limit, the bank will still look at it as if the credit card is maxed out.

6. Look Into Debt Consolidation

Debt consolidation is where you take a bunch of different debts and wrap them up in one loan.

The benefits of debt consolidation can be;

• a single loan can make it easier to manage payments and budgeting.
• it usually means a lower interest rate.
• it is often a loan over a longer period so the payments are generally smaller.

However debt consolidation does have its downsides with the longer period meaning more interest paid overall and it is not always possible in all cases.

For assistance with debt consolidation, complete the below form to have one of our advisors take a look to see if debt consolidation is an option.