Debt and Mortgages
How different types of debt fit into a long-term financial plan
Mortgage Debt
Many New Zealanders’ ambition is to own their own home, which usually means taking on a mortgage to finance the purchase.
Setting up your mortgage in the right way can make a real difference to how long it takes to repay. Even small increases to your repayments can shorten the life of your mortgage, particularly if you lift repayments each time you re-fix.
Getting rid of mortgage debt is often a high priority between the ages of 25 and 40, and sometimes well into your 40s and early 50s.
It is also important to make sure your income is protected. Good quality income protection or mortgage repayment insurance can help ensure your mortgage remains manageable if you are unable to work due to ill-health.
Other Debt
Debt can easily become a trap that makes it harder to get ahead. A few simple principles can help.
1. Credit Card Debt is rarely a good idea
Interest rates on credit cards are very high compared to mortgage debt. The goal should be to repay your credit card balance in full on the due date, by setting up a direct debit for the full balance.
When developing your financial plan, a key priority should be eliminating credit card debt. Ideally, any spending on a credit card should be backed by savings already in the bank so the balance can be repaid immediately.
2. Personal Loans and Hire Purchase loans
Like credit card debt, interest rates on personal loans and hire purchase agreements are usually high. Some also carry significant penalties if you want to repay the loan early.
Read the loan documentation carefully so you understand exactly what you are agreeing to. Where possible, set repayments at the maximum level you can comfortably afford to reduce the debt as quickly as possible.
3. Interest free loans from retailers
Interest-free loans are not necessarily a problem, provided one condition is met: the full balance is repaid before the interest-free period ends.
Many of these arrangements convert to high-interest debt once the interest-free period expires, so it is important not to be caught out. Make sure you can comfortably meet the required repayments, and check whether the cost of setting up the loan outweighs the interest you would otherwise save.
A useful rule of thumb is to only spend money when you already have it saved, or when you are certain you will have it available by the due date.
Moneyworks NZ Ltd
P: 0800 225 621
E: contact@moneyworks.co.nz
7c Hall Street, Cambridge 3434
Licensed Financial Advice Provider - FSP 15281
Regulatory Information: Moneyworks is a Licensed Financial Advice Provider (FSP15281), and AML Reporting Entity and is supervised by the Financial Markets Authority.