The benefits of refinancing
It’s one of the easiest ways to hit financial disaster – mix a credit card debt into a home loan that was otherwise tracking well.
It’s not hard to do – a few emergencies, a few temptations and, before you know it, those ballooning credit card rates hit you between the eyes.
We helped a client recently who was in the grip of this apparent death spiral.
They had racked up $60,000 in debt across a few credit cards with 20 per cent interest. That meant they had to pay back at least $12,000 a year in interest payments.
That was squeezing their home loan repayments and they thought they had one option – sell the home, get some cash and get back to safety.
The only problem was that they would be without the asset that was their home.
They didn’t need to do this and, thankfully, we helped them before the “For Sale” sign went up.
The answer was debt consolidation.
There has never been a better time to do this because of the interest rates that have plummeted.
Since November 2010, the Reserve Bank has lowered the cash rate from 4.75 per cent to 1.50 per cent.
For most of us – and we’re going back here until at least 1990 when the cash rate touched 17.50 per cent – it’s the best environment we’ve seen for refinancing.
So, with the client who had fallen into the credit card death spiral, we helped them to refinance their home loan.
The credit card debt at 20 per cent became part of a new home loan with a rate of a few per cent. The client stayed in their home, became more aware of their spending habits and faced a new financial future.
There is a trap here, though.
With rates this low, it’s a great time to put money away and to pay off a home loan more quickly.
Some people look at it as a way to refinance and to stretch out loan repayments over a longer period.
That can spark its own problem – the client could end up paying off more over time than when they were in the grip of that bad credit card debt.
Every scenario is different and that’s why we always recommend sitting down to talk to come up with solutions.