Check out some strategies for paying off debt when you have a mortgage, or paying off personal debt.
Once you have paid off debt, you should set yourself a savings goal. Having a goal is much easier than saving for a rainy day.
Bear in mind that there are two types of savings;
Short term savings – for smaller things, like a bike or a camera, occasional costs like car registration, or for unexpected costs, like emergency dentistry. Short term savings should not be locked in for a long period of time. Ordinary savings accounts are good for this purpose. But make sure you control the temptation to break into your savings early!
Long term savings – for larger things, like a deposit on a home, or retirement. Your savings can be built up and then locked away in a higher interest earning account, like a term deposit or paid directly into a retirement savings account, like KiwiSaver.
Once you have decided on a savings goal the next step is to set a budget which includes a regular savings amount. Organise an automatic payment of your savings amount from your transactional account into a separate account.
If you organise your automatic payment to go out just after payday then you will not be tempted to use it.
Once you’ve set a budget the most important thing is to stick to it! Get into the habit of checking your accounts on a regular basis. This could be daily, or weekly.
When you’ve saved a decent chunk of money you may like to think about moving it into an investment account. Click through to find out more about Investment Basics.
Strategies for paying off debt when you have a mortgage
All of the options below are subject to lending criteria, please go to your nearest branch, contact a Mobile Lending Manager or call the ASB Home Lending Line on 0800 100 600 to find out if any of these would be right for you.1. Pay it down as fast as you can
It is best to pay off your mortgage as fast as you can afford to, as this means you will pay less interest over the period of the loan.
For instance, if you paid off a $200,000 mortgage at 7% interest over 15 years rather than 25 years, you will pay $111,000 interest over the 15 years (with repayments of $830 a fortnight) rather than $190,000 interest over 25 years (with payments of $660 a fortnight).
You may still want to build up some savings for small goals, occasional bills and emergencies while you are paying off your mortgage. Or you may want to pay into a regular retirement savings plan even though you have a mortgage.
2. Split your loan into fixed and floating
Splitting your loan can give you the ability to pay off some of your mortgage faster, with the flexibility to drop back to lower payments if your income situation changes.
By fixing part of your loan at an agreed interest rate, and leaving the other part of your loan on a floating interest rate, you can pay as much as you like off the floating portion loan, and still have certainty about your payments on the main part of your loan.
3. Add high interest debts to your mortgage
If you have a mortgage as well as other personal debts like credit cards, hire purchase or personal loans, it may be better to refinance them by taking a loan top up.
This is a new, additional loan against your property. You can then choose to repay this debt in a shorter timeframe because the interest you will be charged will be lower ie the current mortgage interest rate.
A low equity fee may apply for this top up loan if it takes your lending over 80% of the value of your property. Talk to a personal banker at your closest branch to check this out, contact a Mobile Lending Manager or call the ASB Home Lending Line on 0800 100 600 to find out if any of these would be right for you.
ASB lending criteria applies and a fee up to $500 and early repayment adjustments may also apply. Special conditions may also apply. You will need to have an ASB transaction account.
Strategies for paying off personal debt
1. Pay off high interest debts firstYou will pay higher interest on credit card, hire purchase and personal loan balances than you will earn on most savings, so it is usually best to pay off these debts before you start saving.
2. Consider debt consolidation
This combines all of your outstanding credit card, personal and hire purchase loan balances into one loan, often at a lower interest rate. You’ll save money on interest costs, only have one fortnightly or monthly payment to worry about and know exactly when you will become debt free.
3. Systematically pay off short term debt
Set up an Automatic Payment so any extra money is not lying around in your day to day account where you may be tempted to spend it.
4. Start saving once your debt is repaid
As soon as you have paid off your debts, set up a savings account and redirect your previous loan Automatic Payment into this account. Since you are already use to making this Automatic Payment, you shouldn’t miss the money.
5. Don’t spend your pay rise
Consider bumping up your Automatic Payment amount. If you never receive it you won’t miss it!
6. Once you have paid off debt
It’s time to start thinking about savings and investments. Click through for information on Investment Basics.
