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Conquer your debt with low interest rates

Zoë Fielding

Many people are taking advantage of low interest rates to get on top of their debts.

Mortgage broker Loan Market says it has seen a 5 per cent rise in transactions involving debt consolidation over the past year.

Are you making the most of the low-rate environment?

What you can do

Consolidating debts into a home mortgage can help reduce the overall rate you pay on money owed and also cut fees and paperwork.

While the official cash rate is 3.25 per cent, the standard variable housing loan rate offered by banks in October was 6.65 per cent, according to Reserve Bank figures. Most people pay less than that.

UBank is offering variable rate loans below 5.5 per cent, Quay Credit Union has a basic variable rate of 5.64 per cent, and State Custodians is offering mortgages of 5.54 per cent, according to Infochoice.com.au.

In contrast, low-rate credit cards were charging 13.3 per cent on average in October and standard credit cards were charging 19.6 per cent, RBA data shows.

If you’re carrying $3000 debt on a low-rate credit card, charging 13.3 per cent, and rolled that into a home loan charging 6 per cent, you’d save $219 a year in interest.

The trap to avoid is getting more credit cards and getting further into debt.

Also bear in mind that increasing the size of your mortgage means it may take longer to pay off if you don’t make extra repayments.

Just a small amount extra each month can make a big difference to the life of the loan. Paying an additional $100 a month on a $300,000 variable 25-year rate loan at 6.25 per cent will save $36,390 in interest plus two years and seven months off the term of the loan.

Linking an offset account to the home loan can help too. The amount in the offset account reduces the interest on the loan in the same way as if you had repaid that amount off the mortgage. The money remains at call in the account, rather than having to request a redraw from the lender.

And don’t forget to shop around for a mortgage. Mortgage brokers can help - they are usually paid by commissions on the loans they sell so they don’t cost you upfront, but they don’t have access to all products on the market. Otherwise, try comparison websites such as Canstar, Infochoice, or helpmechoose.com.au, which is run by Mortgage Choice.

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