Re-financing debt to get the best deal is more important than you might think

We did some Googling and according to Canstar, the typical Aussie owes $3,925 on their credit card, has a personal debt of $21,200 (excluding credit cards and property loans) and has a mortgage of $540,166.

Let’s look at how that plays out in monthly repayments and let’s see what happens if we re-finance and invest the difference.

Note – this did not require any more earning capacity, no need to borrow any more money, just straightforward shopping around for the best deal.

Starting with debt interest rates.

Typical Credit Card Interest Rate = 19.94%

– Source: According to the Reserve Bank of Australia, the average standard credit card rate is 19.94%

Typical Personal Loan Interest Rate =14.41%

– Source: According to RBA data, the total amount of outstanding personal loans in Australia is more than $145.5 billion as of September 2020. The RBA reports that the average variable interest rate for a personal loan is 14.41% and 12.42% for a fixed personal loan.

Typical Home Loan Interest Rate = 3.93%

– Source: Finder. Average variable mortgage interest rate 3.93%

In summary we have monthly repayments of

• Credit Card – $363.69/month for 12 months (assume pay off in 12 months)
• Personal Loan – $729.58/month for 36 months (assume pay off in 36 months)
• Home Loan – $2,559.69/month for 30 years (assume pay off in 30 years)

Total repayments are

• First 12 months – $3,652.96/month
• Next 24 months – $3,289.27/month
• Next 28 years – $2,559.69/month

Now let’s assume we can re-finance our Credit Card and Personal Loan debt into our home loan

• Current home loan is $540,166
• Add Credit Card of $3,925
• Add Personal Loan of $21,200
• Total Debt: $565,291
• New Monthly Repayment: $2,678.75

That’s already a huge saving of $974.21/month and all we needed to do was re-finance our home loan!

What if we invest the difference?

Let’s see what happens if we INVEST the $974.21 into a fund returning a modest 8% per year

• 1 Year Later – $12,128
• 5 Years Later – $71,581
• 10 Years Later – $178,227
• 30 Years Later – $1,451,923

That is EXTRA to what you didn’t have before!

***Note this assumes that you kept going and it doesn’t account for taxation

What if we get a better deal on the home loan?

Accordingly to my Googling, and yes there is a lot of assumptions based on your financial situation, but let’s assume you are in a position to re-finance your home loan rate down to one of the advertised 2% p.a rates instead of the average 3.93% that we started with.

• Current home loan is $540,166
• Add Credit Card of $3,925
• Add Personal Loan of $21,200
• Total Debt: $565,291
• Change Interest Rate to 2%
• New Monthly Repayment: $2,090.20
• Excess Monthly to Invest: $1,562.76

Let’s see what happens if we INVEST the $1,562.76 into a fund returning a modest 8%

• 1 Year Later – $19,456
• 5 Years Later – $114,826
• 10 Years Later – $285,900
• 30 Years Later – $2,329,074

In summary

There is no secret magic going on here, it comes down to a simple understanding of compound interest.

Yes, there are tax implications and yes there are assumptions about your ability to get finance and yes 8% p.a could be deemed risky. However, the point of this illustration is to demonstrate how paying a little bit of attention to your existing debt and interest rates can pay huge dividends over time.

What’s more, these scenarios did not require any promotions or second jobs, no need to borrow any more money, just straightforward shopping around for the best deal.

All of these calculations are simple to do yourself with these two calculators:

Loan Calculator – sum up your debt here and change the interest rates based on the best deal you can get

Savings Calculator – put the saving in the monthly repayment in this box and hit the go buttons.

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Wondering if you can withdraw your super early to use as a house deposit? Read our question and answers on this topic here.