Finance Your Budget Ask the Expert: Paying off debt and investing in property
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Ask the Expert: Paying off debt and investing in property

Licensed financial adviser Craig Sankey answers your burning finance questions. Photo: TND
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Question: I have slowly seemed to accumulate a lot of debt – home loan, car loan and two credit cards. I now want to pay them down in the fastest way possible. Should I also consolidate these debts?

The level of our debts is really starting to worry me.

Answer: Australian households have some of the largest debt-to-income ratios in the world. This often causes stress and leads people to feel as though they are on a debt treadmill.

Getting your debt under control will not only lower your stress levels but also allow you to ‘get ahead’ and start saving towards other goals you may have.

The following tips can help you manage, and pay down your debts.

1. Work out your total debt and debt repayments

Take stock. What is your current combined total level of debt? What are the minimum repayments, and how much are you paying?

2. Draw up a budget

A budget can help you work out how much you can afford to repay in order to fast track your debt repayments.

3. Identify other sources of income and reduce discretionary spending

Is there a way you can increase your income? Can you work more hours, or sell unwanted items? Are you likely to have any financial windfalls, such as a bonus or inheritance?

On the spending side, cut back on other areas of spending for a while in order to increase debt repayments for a specified period.

4. Stop adding more debt and build up a cash reserve

There should only be a limited number of times you go into debt, perhaps to buy a home, or for investment purposes such as buying shares, managed funds or an investment property.

Credit cards, personal and car loans should be avoided if possible. Instead, build up your cash savings and set savings goals for items you wish to purchase.

5. Prioritise your debts and pay on time

Generally, debt that has the highest interest rate, and debts that are not tax deductible, should be repaid first. Also, ensure you pay on time to avoid late fees and interest charges.

6. Consider consolidating your loans/shop around for a good deal

Consolidating all your debt into one loan with a low interest rate can be a very effective strategy.

However, ensure your new repayment amount is at least equal to the combined total of your current repayments across all of your debts – otherwise you may end up paying back more in interest.

Shopping around for a loan with low interest rates and fees can also save you thousands of dollars.

7. Stay motivated

This is often the deciding factor as to whether you are successful. So, how determined are you to become debt free?

Write your goals down and refer to them regularly. Print out a graph that shows your current level of debt and place it somewhere prominent.

Every time you reduce your debt by a set amount, colour in the graph to highlight your progress.

Paying down debt can take time, so anything you can do to stay motivated is worth doing.

8. Ask for help if you need it

If you feel overwhelmed by debt, contact a financial counsellor as soon as possible. If you get help early, you will have many more options. You can also call the National Debt Helpline on 1800 007 007.

Question: Is it better to buy property in an area you want to live in, where the property value has been relatively stagnant, or invest in an area where the property value is increasing?

There are varying views on this topic, but it comes down to what is important to you and your objectives.

The below are some considerations to assist you in weighing this up.

Firstly, from your question I assume this property will become your principal place of residence, i.e. the home you live in, and not an investment property.

When buying a home, it’s important to consider your lifestyle factors, as you are the one that will be living in it.

This may include the home’s proximity to work and family, schools, the CBD, shopping centres, public transport and infrastructure, as well as the size of the house and land.

You may want to put together a list of must-haves and nice-to-haves.

Many, but not all, of these lifestyle factors will overlap with the future investment value of your home, such as being close to good schools and transport, as these are items that are commonly sought after.

From an investment perspective, it’s worth keeping in mind planned infrastructure projects in the area, as they could also have a positive impact on the value of the property.

These may include the building of a new train station or freeway to provide better transport access, or the arrival of major employers that bring jobs to the area. A recent example of this was Amazon announcing a second fulfilment centre in Melbourne.

Historically, larger homes on big blocks close to the CBD have seen the highest property value increases. However, you generally need large deposits and the ability to take on and service large debts. And areas where demand is high and land scarce have also tended to perform well.

A word of warning, though. Just like all investments, there are risks associated with real estate and past performance is no guarantee of future results. Some suburbs that stagnate for years may all of a sudden achieve capital growth.

Your budget and willingness to borrow large sums will also play a part in your options. In this regard, you could speak with a mortgage broker or financial institution to see what you can afford, as this will affect the suburbs in which you can buy.

If the future investment value is of the most importance to you, then you should consider speaking with some real estate agents and property managers to get a range of views.

Additionally, research potential future values of suburbs, rather than their past performance, by doing some further investigation over the internet or purchasing professional suburb research reports.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.