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Save or Reduce Debt

Discussion in 'Property Finance' started by Liam Blanden, 21st Oct, 2015.

  1. Liam Blanden

    Liam Blanden Well-Known Member

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    I have 6k on a car and 2 on a CC atm and I was wondering if I ignored these debts and started saving for an IP it would effect my change of gaining finance? The intrest paid on these debts are minimal and if i choose not to pay them off I can get into the market 9 months earlier :D

    Ideas?
     
  2. Mumbai

    Mumbai Well-Known Member

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    You pay interest on a cc debt?
    Pay that off first.
     
  3. Jerry O

    Jerry O Well-Known Member Premium Member

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    without knowing much of your financial position. I would say pay off CC debt, then save for deposit.
     
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  4. Tony Fleming

    Tony Fleming Well-Known Member Business Member

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    I'd personally try to get rid of the non deductible debt first. By the time you've done that hopefully a price correction will be happening :)
     
  5. D.T.

    D.T. Adelaide Property Manager Business Member

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    Reducing the debt means you'll be able to borrow more, obviously.
    However, not having a deposit means you won't be able to borrow at all.

    So, it's going to have to be a discussion with your broker after you've done up a budget or projection. Eg compare 35k deposit and 6k debt vs 41k deposit and 0k debt and see what capacities each of the scenarios gives you. The totals will obviously differ due to interest leaking out.

    Personally, I hate bad debt and looove good debt. The way I see it, if you are spending a couple hundred paying something off a month, then you could be rid of that and spending that couple hundred on your house deposit account instead.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It depends on your servicing. If you are on a good wicket and servicing is fine with the debts, I'd leave them and save for your deposit.

    If you want a bit of both, pay off the CC debt first and leave the car loan, as that will pay itself off eventually anyway.
     
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  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    A $6k car loan and $2k in credit cards (am I interpreting this right?) probably isn't going to change a finance application that dramatically; these are fairly small figures.

    However they're also not a huge amount compared to what's often required for a deposit these days.

    You probably need to understand the finances required for the proposed investment purchase better. This will guide you to where and how to prioritise your cash flow.
     
  8. Liam Blanden

    Liam Blanden Well-Known Member

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    I have a fairly good understanding of the costs associated with buying a home and as i am going halfies with my partner on a new build, we are eligible for FHOG and Construction grant in SA. Looking at probably saving 5% as proof to the bank we can save money and using the other grants to pay for the rest of the deposit to hopefully 88% lvr.

    In terms of servicing i can easily pay these debts off with min repayments and still have over a grand free each month, im just itching to get in the market and get started :(
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Paying off a CC with a 20% rate is like getting a 35% return on your money. To pay $50 interest per month you probably have to earn something like $80 before paying tax to be left with $50.
     
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  10. Beelzebub

    Beelzebub Well-Known Member

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    Pay off CC. then save. If you need the $2k when it comes time to put down a deposit go get another $2k credit card. In the mean time you have saved your interest. But check it all out with a broker first
     
  11. Liam Blanden

    Liam Blanden Well-Known Member

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    Once again I appreciate your collective wisdom. I'll get the cc sorted asap. Thanks all
     
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  12. tobe

    tobe Well-Known Member

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    Save first then pay off credit card, or do both at the same time. FHB need to demonstrate a 3 month savings history, so postponing the start of that period delays the eventual finance application and property purchase.
     
  13. tobe

    tobe Well-Known Member

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    But its also continuing to pay rent and not be in the property market for a further time (9 months according to the OP). Psychologically many people find it easier to grow new savings than to reduce old debt.
     
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  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I recall seeing a client who had about $30k owing on a credit card and about $30k or more cash in his bank account. I asked him why he didn't pay off the card and he said he wanted to keep the cash for deposit. I couldn't help with a loan and he went away.

    he came back about 2 years later and still had the debt owing on the credit card, but had a little bit more in savings.

    So much interest was paid in the mean time.
     
  15. Waterboy

    Waterboy Well-Known Member

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    Anyone with CC debt not paid in full on time is wasting so much money in fees and interest. Unless it's a 0% balance transfer and you put all the money in a high interest savings account (or offset).
     
  16. 2FAST4U

    2FAST4U Well-Known Member

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    I don't understand that logic at all. It's literally 1 step forward and 2 steps backwards when you've got bad debt (credit cards/car loans) accruing interest. If the car loan is on a payment plan I'd just keep making the minimum repayments until it's paid off but wipe the credit card debt off asap and than start saving a deposit, whilst also keeping up the car repayments on the side.
     
  17. tobe

    tobe Well-Known Member

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    You all win the logical economical man award. In practice a lot of people operate differently. In this particular case the OP has said concentrating on paying out the debt will mean he has to pay rent for 9 more months than if he didn't. Having the debt wont make a difference to whether he can get a loan or not.

    Once he starts saving for his deposit, it will build momentum to continue to save, not spend anything else on his card and or find further savings to pay the card off. In practice he could spend 3 months saving 5%, get a loan approved, pay off the credit card and settle with the FHOG and SA construction grant money, and actually use only a portion of the funds he saved towards the deposit.

    I also recommend people with multiple debts to concentrate their fire on the debt with the lowest balance, rather than the highest rate, again for the psychological advantage of getting ahead, and being able to have a win early, rather than the logical conclusion to direct any extra fire power at the debt with the highest interest, which may take longer to pay out.
     
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  18. albanga

    albanga Well-Known Member

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    Not that I am advocating it as I would personally pay down bad debt but you could definitely win out by not doing so. In the OPs situation it is only a small amount but in say Terry's example, if his client used his brains and purchaed an IP that expeienced signifanct growrh then the fees on the CC would be well and truly offset by the growth.
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thats a big 'if', especially in this climate.
     
  20. Beelzebub

    Beelzebub Well-Known Member

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    This is so true, and something I have worked about myself. I have a weakness in the logical economist sense. I understand what the best, most logical thing to do is, I attempt to do it and fail. It was when I figured this out that I started to actually get ahead. I worked out what my psychological weaknesses were and attempted to work around them and it worked. Credit card was a big part of that. If i paid $1k off my credit card I found a way to need to use it to buy something. However if the card was maxed I couldn't and for some reason I wouldn't touch my savings.

    I don't so much have this problem now. I find as I have more cash it's easier to stick to being economically rational. Nevertheless, knowing my weakness, I no longer have a credit card and will never get one again.