The sooner you enter the property market the better, right? So you put as much money as you can towards a deposit for that important first purchase. But what about those bothersome debts that won’t seem to go away?
Whatever it is, debt creates a dilemma concerning where you should be allocating your hard-earned cash. Do you pay off existing debt first or put money towards a deposit for a house?
The answer ultimately depends on your individual situation; however, good money management works on the principle that debt should be paid down as quickly as possible because of the interest it incurs.
Special offers notwithstanding, most credit cards charge an annual fee of around 13 per cent per annum whereas even the best high interest savings account will only give you an interest rate of around five per cent.
Let’s look at a quick example. A $10,000 personal loan at 13 per cent interest based on a five-year term would have you looking at total interest expenses of $4, 252 (based on minimum repayments) – that’s almost an extra 50 per cent on top of your original loan in expenses.
By paying off those expensive debts sooner you will not only be able to work on saving for your deposit but your credit rating and borrowing eligibility will increase, making borrowing easier in the future.
Lenders’ serviceability assessments are influenced heavily by borrowers’ existing debt obligations – meaning the less debt you have, the better your chance of having a loan approved.
While it may seem frustrating to put your property ownership dreams on hold it is important to remember that a mortgage is a long term financial commitment and focusing on your current debt may be in your best interest in the long run.