Escaping the cycle of debt

Posted on 30 May, 2019

As they settled in for a meeting with their mortgage broker, Jane and Matt Johnson* had reason to be quietly confident.

With a joint income of $200,000 and about $30,000 in savings, it seemed at first glance that they would be on track for their first home loan.

However, their mortgage broker, Davina Skene of Green Associates, soon discovered a big red flag: a debt of more than $80,000 on credit cards and personal loans.

“There was a personal loan for a car, credit cards for holidays that they took as a family every year (and they were all overseas holidays), and then there were some that they couldn’t even give me a reason for,” Davina says.

“They were living a very lavish lifestyle which was discovered once I went through their living expenses. There were so many unnecessary purchases being made and some that the other partner didn’t realise was occurring.

“It was a big reality check for them and I spent the next half hour showing them some ways we could work on reducing that debt and get their spending under control.”

Within six months, Davina helped Jane and Matt more than halve their debt by changing their lifestyle and using a big chunk of their savings that was earning less interest than what they were being charged on those debts. Davina then started working on getting the couple’s savings to a place they needed in order to purchase a house in their price range.

“It took them another two years to get to that level and we were able to get them into their dream home which really was such a proud moment for all of us,” she says.

It’s not an uncommon anecdote; with household debt on the rise in Australia thanks to higher house prices and cost of living, not to mention new facilities such as AfterPay and Zip Pay adding a new level of concern.

Somewhat surprisingly, Davina says the younger generation is often better at managing their money, as they are becoming more and more aware of the credit issues that can occur if they are not careful and are not applying for higher limit credit cards which were more common five to 10 years ago.

Davina Skene.

“I actually find that it is our middle generation (30-45-year-olds) that have the highest level of ‘bad debt’ issues,” Davina says.

“Mums and Dads trying to keep up with the bills, school fees, sporting costs etc are the ones that are most likely to use a credit card to pay for these extra costs that they may not have accounted for.”

As Green Associates’ in-house mortgage broker, Davina says there is no “one-solution-fits-all approach,” and in the first instance she aims to get an understanding of a client’s financial position, working through their goals one at a time and helping them find the right home loan.

“One of the first things I like to explain to my clients is that not all debt is ‘bad.’ The ‘bad debts’ are the debts like credit cards, personal loans, after pay etc,” she says.

“The reason I call these ‘bad debts’ are due to the purpose of what the funds were used for. Most of the time these purchases are usually for a depreciating asset such as a car or an intangible asset like a holiday.

“Whilst these debts are sometimes necessary, it is always recommended that we eliminate these debts quicker than what is scheduled due to the higher interest rates and generally higher account fees.”

Although it can be hard escaping the debt cycle when you are also keeping up with interest costs, Davina says visiting a mortgage broker can make all the difference, with expert advice and a focus on cashflow.

“I have outlined solutions for clients and [when we] revisit them in 12 months it is extremely rewarding to find that when they have followed my advice and are getting ahead,” she says.

Her advice for those struggling with debt is to become more aware of their “cashflow levers.”

“Ask yourself the question, ‘do I need this right now or can I save up for it? Is this worth the stress of the debt that I will have?’ There is a tendency right now to not calculate the trade-off for purchases, for example ‘if I purchase this right now it will mean I have my home loan for another year’,” Davina says.

“Debt consolidation is also a viable option as long as you ensure that the remaining term of the existing debt is equal to the term of the new loan. For example, if you have a car loan and a credit card and your car loan only has three years left on it, consolidate the two together into a personal loan for no more than three years.

“Start by working out which of your debts has the highest interest rate and try to pay just a little bit extra off that one each month. Even $20 a month can make a huge difference.”

the essentials

What: Green Associates
Where: 3/10 Geils Ct, Deakin
How much: Initial consultations with Davina are free of charge
Web: greenassociates.com.au

*Name has been changed.

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