Insights · Property and lending
Paying down debt: a plan that works
Debt isn’t always bad. A home loan or a loan for an income-producing investment can build wealth. But high-interest consumer debt drains money every month, and the longer it runs, the more it costs. A clear plan makes the difference.
Step 1: list everything
Write down every debt: credit cards, buy now pay later, personal loans, car loans, the mortgage, any money owed to the ATO or to family. For each, note the balance, interest rate, minimum repayment, and whether the interest is tax deductible.
Step 2: decide the order
The avalanche method
Pay the minimum on everything, and put every spare dollar on the debt with the highest interest rate first. When it’s gone, move to the next. This saves the most interest.
The snowball method
Pay the minimum on everything, and put every spare dollar on the smallest balance first. Clearing debts quickly builds momentum. It costs a little more in interest, but many people find it easier to stick to.
Either works far better than no plan.
Deductible debt last
Interest on a loan used for an investment property or shares is generally tax deductible; interest on your home, car and credit cards isn’t. A dollar paid off your home loan saves you the full interest rate; a dollar paid off a deductible investment loan saves less, because of the tax deduction you lose. So pay off non-deductible debt first.
Step 3: cut the cost of the debt
- Call your lenders and ask for a lower rate. It works more often than people expect.
- Balance transfer cards can give months at 0%, but only help if you clear the balance before the rate jumps, and don’t keep spending.
- Consolidation: rolling several debts into one lower-rate loan, or into your home loan, cuts repayments. But spreading a car loan over 30 years can cost more in total. Keep paying the consolidated amount off at the old repayment level.
- Refinance the mortgage if you’ve had the same loan for a few years. See refinancing.
Step 4: stop new debt
- Reduce credit card limits, or close cards you don’t need. Limits count against your borrowing power even if they’re unused.
- Remove saved cards from shopping sites, and close buy now pay later accounts.
- Build a small emergency fund, so an unexpected bill doesn’t go straight back on the card.
Step 5: use the mortgage tools
- An offset account reduces interest on your home loan while keeping the money available.
- Extra repayments, even small ones, cut years off a 30-year loan and save tens of thousands in interest. Try our extra repayments calculator.
- Paying fortnightly instead of monthly makes the equivalent of one extra monthly payment a year.
Business owners: watch the ATO debt
Unpaid tax, GST and super are expensive debts: the ATO charges interest, and directors can become personally liable for unpaid PAYG, GST and super. Lodge on time even if you can’t pay, and arrange a payment plan early. See profitable but cash poor?
If it’s become too much
The National Debt Helpline (1800 007 007) offers free, confidential financial counselling and can negotiate with creditors. Avoid “debt fix” companies that charge high fees and may push you into formal arrangements with long-term consequences.
Get help with a plan
Judge Lending can look at consolidating or refinancing, and your accountant can tell you which debts are deductible and how to structure things for tax. See refinancing.