This year I have again volunteered for the Financial Planning Associations’s Ask an Expert program. Following is one of the questions I just received and my answer.
Hello Matt, my husband & I own our own home but have a mortgage of nearly $300,000. It is an equity style loan, we only have approx $30,000 of equity left to use.
We are paying interest only and those payments we are finding very hard to meet, we do have a credit card which i think is probably not a good idea.
We are currently a single income family with an income of around $62,000 a year gross. But we have approx $15,000. of business related outgoings per year, this figure can go up to $20,000 a year.
We also own a half of an inheritance property worth a lot of money but the other party doesn’t want to sell.
Our question is, is there a way given our current situation that we could manage to cut down our debt and start to pay some of the money off our loan without losing our home?
As I don’t know you personally I don’t know your level of financial knowledge, so in explaining my guidance I’m going to start from some base principles. Please forgive me if this seems like statements of the bleeding obvious – it is not my intent to be patronising.
Your priority in reducing debt should be highest interest rate debt first then cascade down to lowest interest rate debt. Therefore if you have a carry-over credit card balance you nail that first, then personal and car loans and finally home mortgage. Paying off your debts in the right order is a fast way to generate spare cash for further debt repayments.
At the core the ways to reduce debt are:
- Make lump sum additional repayments
- Make higher regular repayments
To be able to make higher regular repayments you either need to:
- Increase your earnings;
- Reduce your costs (spending);
- A combination of both of the above.
Some options to help you achieve that include:
- Crank the business earnings
- Get a second, even third job (Perth restaurants and cafés are crying out for staff so they can actually deliver decent service)
- Pull your belts in so you spend less. You may need a cash flow coach to support you in creating the new habits to do that. It is a bit like a personal trainer for you money.
My article on budgeting may provide some guidance on reducing your expenses.
You can make higher lump sum repayments by selling stuff you don’t need to generate cash. Or you could even sell other investments and repurpose them to debt repayment.
If you really think you are close to losing your home and if the only other wealth you have is the inherited property then you really need to either sell it or mortgage it. A mortgage it is probably not feasible as that’ll just increase your repayments. If you haven’t done so already then perhaps tell the other owner of the inherited property that if you don’t sell then you’ll end up losing your home. Maybe they could consider buying your share from you?
To get out of a financial pickle like this it really comes down to ‘what are you prepared to do?’ There is no magic rabbit out of a hat. You have to dig deep and hustle.
Once you sort out your cash flow then it’ll be more appropriate to consider a plan. Watch my free presentation on The Six Stages of Wealth Creation to get a sense of the right next steps from there.