6 Tips for Getting on Top of a Debt Mountain

Important: Debt repayments can reduce the cashflow available for mortgage repayments. When assessing your loan application, lenders factor debts and limits into affordability assessments, which can reduce the amount you are able to borrow for buying your home.

• $10,000 on a personal or bank loan can materially reduce borrowing capacity, as an industry rule-of-thumb example
• $10,000 of credit card debt can materially reduce borrowing capacity, as an industry rule-of-thumb example

1. Create a Budget That Includes a Weekly Debt Repayment

If you are serious about buying your first home, a budget can be a useful part of your plan. A budget can help get a repayment plan on track and once you're at zero debt, these payments can become contributions to your deposit. The key part of budgeting is to include a regular amount for debt repayment. Setting regular repayments can help, but make sure payment timing still leaves enough for essentials and avoids missed payments.

2. Prioritise the Debt with the Highest Interest Rate or Smallest Debt

If you've got debts of various types (credit card, personal loan, hire purchase), prioritise them for focused repayments. Option 1: Prioritise the debt with the highest interest rate to minimise total interest cost. Option 2: Focus on the smallest debt which helps get the ball rolling and encourages you as you tick one debt off the list.

3. Contribute Any Additional Cash to Debt Repayment

From time to time we come into some unexpected money, be it a work bonus or a tax refund. While the temptation is to spend it, consider whether extra cash is best used for high-interest debt, an emergency buffer, deposit savings, or another priority.

4. Make Efforts To Change Spending Behaviour

Getting on top of your debt is really only going to truly work with a committed effort to change the behaviours that got you into debt. Did you buy a new car on finance? A better approach is to re-adjust your sights to a car you can afford to buy from money saved. If you've got credit cards that you struggle to avoid maxing out, consider discussing whether reducing limits, closing unused cards, or changing spending habits makes sense before applying, because timing and lender treatment can matter.

5. Reduce Your Credit Card Limit

If cancelling your cards really isn't an option, then reducing their limits will still have a positive effect on your ability to borrow from the Banks. Reducing your credit card limits can have two effects: firstly reducing your available funds to curb extra spending. Secondly, lenders may assess credit-card limits as an available debt commitment, even if the card is not fully used. The exact treatment varies by lender and application.

6. Look Into Debt Consolidation

• A single loan can make it easier to manage payments and budgeting
• It may mean a lower interest rate
• It is often a loan over a longer period, so the payments may be smaller, but compare fees, total interest, repayment term, and whether the loan actually helps you reduce debt