5. Debt Consolidation & Restructure
| Clients |
Andrew and Joanne |
| Problem |
Andrew and Joanne hadn’t reviewed their banking arrangements for several years. Their facilities include: |
| Debt |
Balance
|
Interest rate
|
Current
|
| Home Loan (15 years) |
$150,000
|
6.1%
|
$1,275 pm
|
| Personal Loan (5 years) |
$15,000
|
11.5%
|
$330 pm
|
| Credit Cards |
$8000
|
17.5%
|
$120 pm
|
| Investment Home Loan (15 years) |
$250,000
|
6.1%
|
$2,125 pm
|
| Total debts |
$423,000
|
|
$3,850 pm
|
| Solution |
1. Consolidate their personal debts into the facility with the lower interest rate – repaying the credit card and the personal loan. They switched their repayments from monthly to fortnightly which had the effect of reducing the daily loan balance and total interest charges.
2. Convert their investment home loan to an interest only facility – the reduced repayments of $850 per month were applied to the housing loan. This is a tax effective strategy with the net effect of accelerating repayment of the housing loan (the non-deductible or inefficient debt) whilst maintaining the balance of the investment home loan (the tax deductible or efficient debt). |
Their new arrangements are as follows:
|
Debt
|
Balance
|
Interest rate
|
Current
|
| Home Loan (less than 7 years) |
$173,000
|
6.1%
|
$2,575 pm
($1,190 pf)
|
| Personal Loan |
Nil
|
N/A
|
Nil
|
| Credit Cards |
Nil
|
N/A
|
Nil
|
| Investment Home Loan (interest only) |
$250,000
|
6.1% pa
|
$1,275 pm
|
|
Total debts
|
$423,000
|
|
$3,850 pm
|
As Andrew and Joanne decided to keep their total repayments at the same level, they will obtain a significant interest saving. Their housing loan will be repaid in less than seven years, which is less than half of the remaining term.
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