David Chaston reviews eleven useful tools that can help get you out from under a debt burden

David Chaston reviews eleven useful tools that can help get you out from under a debt burden

The stresses of the GFC (global financial crisis) have changed the way we look at debt.

We all now understand that 'leverage' (buying things with debt) can and does work both ways, and when things turn down, the pressure on household budgets can be severe.

Getting out of debt has become a worldwide phenominum - its called 'deleveraging' and New Zealand households have been going through the process for a number of years. Our chart of consumer debt shows it clearly.

This website has an array of resources to help you pay down debt.. Knowledge and a Plan are the two first essential elements. These links will aid you getting to the start line. The rest is up to your own personal discipline.


A: Resources to help get out of a mortgage faster

1. Mortgage calculator

Small voluntary increases in the amount of principal you repay can save stunning amounts of interest over the lifetime of a mortgage. This is because mortgages are very long term repayment promises, and the interest cost over a very long term compounds up. You can make this compounding work for you in reverse by paying the loan back faster than the standard terms. This applies to both making regular higher repayments, and making one-off lump-sum repayments.

The best way to see how this can work for you is to use our unique mortgage calculator.
This tool allows you to compare one base scenario with some what-if options.

It also allows you to ‘solve’ for a number of key questions, like the repayment amount, or the term of a loan, or even the interest rate. It is not a beginners tool, but a beginner can easily learn how to use its powerful features.

2. Fix or Float calculator

Should you ‘fix’ or stay floating? It’s a key question that bedevils most people with a home loan. How do you figure it out? We have a tool that can help.

It uses what the professional money markets are saying at the time you use it as to what they think the future OCR will be (as paralleled by the 90 day bank bill rate, and the futures and swap rates), and works out whether ‘now’ is a good time to switch to a fixed rate, or stay floating. It shows you what the cost or benefit would be for your mortgage.

But of course, there is more to this decision that ‘the numbers’, but knowing’ the numbers’ can often help you make a better informed decision.

3. Where can I Buy? tool

If you want to buy a house with an affordable mortgage – that is a mortgage whose repayments won’t consume more than 40% of your take-home pay – this tool will help you focus on the neighbourhoods where you should look for a house.

It asks you to enter your income (and you can enter elements separately for you, your partner, and some other income sources if you have any), and enter where you would like to live. It will then suggest towns or neighbourhoods which have median priced houses, or first-quartile priced houses that will fit your requirement for an affordable mortgage.

Of course, you may well be able to find a great-value buy in other places, but this tool will help you focus on areas where you have the most likely chance.

4. Mortgage rates compared

If you are needing a new mortgage, or needing to roll one over, you should always try and negotiate a better rate from the lender. The trick is ‘knowing the market’ and knowing what to ask for. The best place to start is to check out the lenders' published rates.

Like most major purchases, there is much more to a decision that just the ‘price’, but for any mortgage, ‘price’ is an important component – after all you are entering into a long-term legal and financial commitment.

Most lenders will negotiate the interest rate down, especially if you have an ‘affordable’ financial situation (it’s much harder to negotiate if you have less than 20% equity in the house), and depending on the market you should target a rate discount of between 0.5% and 0.9%. You may not get all of that, but this is where many mortgage brokers start.

We also have the option of signing up to our daily mortgage email. Sign up a month or so before you need to make a big mortgage rollover decision so that you get a good current understanding of the market. You can easily unsubscribe once you have done the deal. Email signup links are on our mortgage page in the right-hand sidebar.

5. Track mortgage rate trends

Knowing the market interest rate ‘now’ is important, but knowing how rates are trending is another useful piece of market ‘ammunition’. Our mortgage rate trend graphs are very helpful to give you that perspective.

6. Rent – or – Buy ?

Buying you own place is a realistic goal for many people, but there are stages in your life where it is better to rent – much better. The same is true in the economic cycle; there are times when it is better financially to rent.

But deciding when to make the transition from renting to owning is a complicated decision. We have a regularly updated Report that tracks some key features of this decision. It focuses on the financial aspects (and there is more to the decision that the pure financial aspects), but these Reports can help you see some important aspects clearly, and make that part of your decision easier.

7. Home loan affordability

In partnership with Roost Mortgage Brokers, we research home loan affordability monthly for most regions, cities and towns in New Zealand. These Reports can help you know whether mortgages are getting more or less affordable in the place where you live. They can also show whether you will need one income, or more-than-one income, to maintain affordable mortgage payments.

We do these reports for ‘standard’ home buyers – which focus on 30-34 year olds – and for ‘first-home buyers’, which focus on 25-29 year olds. We also look at household incomes, and do this on an after-tax basis with the benefits of any Working-for-Families programs rolled in as well. It’s the market-leading Report series on home-loan affordability, used by families, lenders, researchers, and the people who make public policy. It is updated monthly. It’s free.

B: Resources to help get out of Personal Debt faster

1. Credit card minimum balance calculator

If you have never thought about your credit card, and if you usually just make the ‘minimum payment’ each month, you are in for a big shock. ‘Minimum payments’ are financially dangerous things – and just how dangerous can be found by using this tool.

Chances are you won’t believe the results at first. Most people are simply astounded at the costs of making just ‘minimum payments’. The sooner you get off of that trap, the better. Tell everyone.

2. Credit card rates compared

Credit cards are really, really useful things – but they can also be a really, really expensive way to buy something. It is rarely wise to use the ‘credit’ part of the card, but there are some situations where it is either unavoidable, or can make sense. Occasionally, card rewards can offer benefits.  In those cases, you should choose a card with the lowest total costs – that is, the lowest combination of interest rate, fees, and rewards benefits. A good place to start comparing cards is our credit card comparison pages.

These pages are an independent comparison resource, and they can help you make a short-list of cards that might suit you. They show the interest rates for purchases, for cash advances, and the balance transfer interest rate. There is a separate page for those all-important card fees which you must look at. It is never nice getting expensive surprises on your credit card statement.

3. Car loan rates compared

Car loan interest rates are very hard to compare. Most car loans are made by car dealers and it is not until you have made a verbal agreement right at the end of your car-buying ‘experience’ that you will get to know how much the cost of the credit will be. The dealer wants you to buy the car and will entice you with the ‘affordability’ of the payments. But it is important to understand the total cost of the credit – the combination cost of interest and fees.

The good news is that car loans are ‘competitive’ and if you can engage them in negotiating the cost of credit in the same way you will negotiate the price of the car, you can save significant amounts of money. Start by knowing the current car-loan interest rates from those companies that publish them.

Those that do publish them are often the most competitive, and there is no reason to be paying more. The AA members rate is an excellent benchmark.

4. Personal loan rates compared

The cost of credit in most personal loans is usually high. Therefore it is always wise to enter into these contracts only after you are satisfied that the cost is ‘worth it’. Most people will be surprised at the impact of the interest cost in the total outlays for a major household item bought using debt (the term for which is usually sanitised as ‘credit’ – ‘credit’ sounds much better, but it is still debt).

For example, a 36 month ‘credit contract’ at 22.95% interest to buy a $1,500 piece of whiteware will mean you will end up paying $2,004 plus fees. Would you have bought it for $2,004+ if you had known that was the cost? I doubt it because that is the same as agreeing to pay one third above the cash price. Who does that knowingly?

If you need to use personal loans, it is crucial to get the lowest fees and lowest interest rate you can. And the place to start is to look on this page:

Don’t focus on how ‘affordable’ the payments seem on a weekly basis (you can make them seem ‘low’ by stretching out the period you pay off the loan; it’s a trick) – focus on the $ amount of the cost of interest-plus-fees because that is what you will be paying over and above the cost of the item.

Personal loans should only be used by people who are financially disciplined and confident with managing their money. But they are designed for people with the opposite habits and they are an easy trap for those people.

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Getting out from crushing debt...yes a helpful guide...but from my experience the material required to be taught throughout nz fails to devote more than minutes if that, to the matter of why teens should avoid debt altogether....and to the damage done by debt to families...and so to children...
A balanced set of guidelines for what MUST be taught should include a "Parky" look at banks and money....it should drive home the message that great suffering is caused by debt....and not avoid letting the students in on the great banking credit creation scam...
Given the abundance of screaming evidence to support a good programme of lessons...you have to wonder why it is not taking place...well you might wonder....I don't.

It's down to individual parents to recognise the deliberate scam in the education system...children kept from learning about the dangers of debt...both to their parents and to them and thence to their children...it's for these parents to start to help their children to learn about the parasites and how they use the media to boost demand for their drugs.
Banks should not be seen as gift giving community assets...they are parasitic and destructive.
Parents must understand they can expect NO support from the liars in govt or the state machinery...indeed they are likely to be attacked for not following the rules....
A nation that uses banks in the same manner as all the wealthy do...then you will have a better economy. The wealthy in NZ understand the system the parasites operate and long ago learned to sidestep the rorts and scams. They saved and built wealth with their own capital and they never borrowed from the drug dealers.
NZ would be a wealthier place if only we could crush the banks as they currently operate sucking the lifeblood from the economy by selling created credit.

that's a complete rubbish argument Wolly; wrong and excessively cynical.