Interest Rates with Mates
Local on the Sunshine Coast, Queensland - Australia, Mason Finance Group and our 6 brokers Colin, Todd, Shaun, Shawn, will discuss everything residential lending! From running through scenarios, talking about where interest are heading and looking at specific lenders, you'll be able to keep in the know with what's going on with weekly podcasts!
Interest Rates with Mates
The Debt Reset!
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Episode 10 - Season 4 - The Debt Reset!
We discuss all things debt consolidation!
When is a good time to look at re-structuring so that can help with your overall cashflow and what the looks like from a borrowing capacity side as well!
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Welcome to the podcast series Interest Rates with Mates with your local mortgage brokers based on the Sunshine Coast, Queensland. Good afternoon. Good afternoon. Hello. How are you? How's everyone? Very well. Good. Keeping busy. Good to be here. Very pleased to be here. Thank you for having us, Sean. Alright. First question off the bat. Next Tuesday is the RBA meeting. I always get your thoughts on this. What do you reckon, Todd?
SPEAKER_00Oh, I'm going to go against the grain. I think they will raise. No, actually. I think they will raise rates, but I think they should hold. That's two answers. Yeah. I think they will. Is that a good thing? I think they will raise. I'm pretty sure that's just everyone's. No, I was going to say, I was going to say I think they'll hold, but I actually don't think. But knowing them, I think they will raise, but I think they should hold and just wait. Only because, like, only because of like fuel and cost of living and everything's already at all-time highs. And I know, look, that does, but I just personally think that energy in a nutshell, whether it's electricity, whether it's fuel, that is the reason for high inflation, in my personal opinion. I'm just a humble broker, but that's my personal opinion. Soon as energy increases, everything has to increase in line with it because we use energy to move everything around the country. So if they could just like, yeah, increasing rates, I personally don't think is gonna help the energy problem.
SPEAKER_02It's not gonna help our job, that's for sure. Coming from a humble broker with a big car and choose a lot of petrol. Uh just uh well, if you ask me two weeks ago, it's probably a different answer, but obviously now it's looking a little bit like a rise is imminent. Got a bit more data in, yeah. Yeah, yeah, where they pull that data from. But yeah.
SPEAKER_04This is a G show, just gonna put them up, and I think it's gonna be a couple of times. A couple of times.
SPEAKER_01All right, four for four. All right, I'm going with the rate rise as well, unfortunately. That's all right. We'll uh find out what happens next Tuesday. Uh, but today is debt consolidation. When does it actually work? Um, so you know, we're seeing people with decent incomes uh who still feel like they're living week to week, probably, you know, uh interest rate is part of that. So you've got home loans, you've got car loans, you've got personal loans, you've got credit cards, you've got buy now pay letters, you've got so many different facilities. Um debt consolidation sounds simple, roll it together, lot of repayments and move on, but it's not always that simple, right? You've got to deep dive into it a little bit further to actually understand um, you know, we're always bound by best interest duty. So taking some debt and putting it back over to CDS, it's not really in their best interest.
SPEAKER_00It's not really in everyone's interest, though.
SPEAKER_01So that's a conversation that we have in our advice meetings. But uh, what are you guys seeing at the moment in terms of inquiries about actually doing some debt consolidation?
SPEAKER_00Yeah, like you said, like cost of living pressures, like you know, people on good incomes but just feel like they're still sort of having that cash flow issue and living week to week. Um, I've got a refinance at the moment where we can refinance them onto a much better interest rate, but to do that, we do need to consolidate a car loan. Um, so yeah, it's about having that conversation about yeah, we can make it happen, we can get your home loan onto a better interest rate, but we need to consolidate the car loan into it to once again just to free up cash flow essentially to make it afford like to meet the affordability metrics on a servicing calculator.
SPEAKER_01What's the craziest amount that you've ever debt consolidated off the top of your head?
SPEAKER_00Oh, I had one a few years ago that was up there. I think it was it was over a hundred grand. It was car loans and credit cards.
SPEAKER_04I've definitely had over a hundred grand before when people are getting themselves in really sticky situations when times are good and then the rates start going up just like they are now, and all of a sudden they feel the pinch a whole lot more. So they they turn to us when times are good, but also times are bad.
SPEAKER_00I mean he's saying that 100 grand isn't that much anymore when you think about it. I was just thinking then, like that cart loan I'm doing at the moment is only is 80,000.
SPEAKER_01So I had one last night, a meeting the car loan was 100 grand. Yeah.
SPEAKER_00No, that's one card. One consolidation.
SPEAKER_01Wow. So you've got credit cards on top of that as well. So it does add up, you know, you've got five smaller commitments, but adding those repayments up every month, that's where people are struggling. Yeah, yeah. Um, what's your most unusual debt that you've consolidated? Oof. ATO tax debt.
SPEAKER_02Everyone's got that right. Every second one. I do have one, but you said it's a G show. Some cosmetic improvements. We'll call it we'll call it cosmetic. Yeah, exactly. Right. We've consolidated some cosmetic improvements before.
SPEAKER_01Okay. Um, so just touching on ATO tax debt, right? So not every land, well, there's only specific lenders that will do ATO tax debt consolidation. Uh, these are your non-conforming lenders, so we do have options out there. Have you sort of seen that in the much uh in the past couple of years?
SPEAKER_02I've just uh just had a debt consolidation application recently with a a third-tier kind of well, not a third tier bank, but a non-conforming bank that allows this this type of stuff. Um monthly expenditure was upwards of 30 grand, including business loans, tax debts, things like that. Consolidating it all into his home loan, uh now is paying nine grand a month. So cash flow improvement in excess of 20 grand a month, and he's obviously stoked, just improvement on lifestyle, things like that.
SPEAKER_03Yep.
SPEAKER_02Um similar to what Leah said, like obviously things were going good with the business, took a downward trend, um, took some some debt out to see through that period, and then obviously now gained on top of it. So yeah, it was a good win. The big trap.
SPEAKER_01So the this is what we were discussing off here is that um, you know, say someone's got 35,000 left on their car loan, but they've got four years remaining, we consolidate consolidate that into home lending. The interest rate might be lower, the required repayment might be substantial or lower. Sounds fantastic, right? But if the client is now paying 35,000 over 25 or 30 years, that's a bit of an issue.
SPEAKER_00There's a lot more interest there.
SPEAKER_01There's a lot more interest.
SPEAKER_04Are you still gonna have that car in 30 years' time?
SPEAKER_00Sell it in two years' time, but still have the debt.
SPEAKER_01So this is where we have the conversation to, you know, do a separate loan split. And that split might be uh over five years or six years or seven years. So something that's still manageable from a repayment point of view, uh, but frees up that flexibility from the repayment point of view as well. Um, borrowing capacity as well. Car loaners takes quite a big chunk out of how much you can borrow.
SPEAKER_00And even just having that conversation and explaining to them that, you know, we're increasing your borrowing capacity by consolidating it. But, you know, if you can afford to, try to put that same, like whatever the current car loan repayment is at the moment, try to put that same amount into the home loan now moving forward. Um, you might not be able to do it every week, but where possible, try to use that as an additional repayment into the home loan. Um, because as you said, taking that five-year debt or three-year debt back out over 20, 25 years is going to incur a lot more interest over the life of the loan.
SPEAKER_01Have you ever seen any big mistakes, you know, from other brokers or banks with debt consolidation that you've had to fix?
SPEAKER_00Not from banks or brokers, but from clients I have.
SPEAKER_01Okay, do you have an example?
SPEAKER_00Um yeah, just just habits, like just bad habits where from one interest payment interest free to another to another. You do a debt consolidation for them in 2022, and then two years later they come back, and all of a sudden they've got the credit cards back, the car loan, another car loan, another personal loan, and you're doing another debt consolidation for them. And they come back a couple of years later, another one. And you know, you try to have those stern, well not stern, but you try to have a conversation with them, try to educate them and try to make them aware of of the interest and the fees that they're incurring by taking out those smaller personal debts. Um, but yeah, it becomes a bit of a habit, unfortunately, for some people.
SPEAKER_01Do you do you guys ever have a conversation about you know if we're going to close a credit card um to stop those habits to close it or how do your meetings how are your meetings designed?
SPEAKER_02I think more often than not now, when we are consolidating credit card debts, um, or particularly like credit card balances, it's gotten to the point where they've seen how easy it is for those balances to start accruing and building up. So they're pretty happy to close those credit cards off once they are are consolidating into the home. Um yeah.
SPEAKER_01The client who earns 200k but has no money. So someone uh earns 200k 200,000 from the outside, you'd think they'd be doing incredibly wrong. Incredibly well. Then you see they've got an $80,000 car loan, $25,000 personal loan, $30,000 credit card, another card, mortgage, high living expenses. So they're they've got great money, but their commitments are eating into their income. So when we do the advice meeting, we're looking through the fact find and we're looking ways to, you know, A, see how much they can borrow if they want to upsize, if they want to refinance, and if you know, if it's a refinance, obviously, you know, trying to see if we can consolidate some debt. But as well as it's not when we do purchases as well, that's good, those $80,000 car loan, that's gonna affect how much you're borrowing. So, you know, they might have a deposit of let's say $300,000. We're not necessarily going to use all of that $300,000 to go towards the purchase. We might use $100 of that to clear some debt.
SPEAKER_02And you can see some of that, it always helps when looking at it visually and speaking with the client. You can show that look, if you allocate $40,000 of your cash contribution towards paying out your car loan, it might add $200,000 to your borrowing capacity. And by doing that, you might be on 6% interest as opposed to 9 or 12 or 15% interest.
SPEAKER_01Correct. When have you looked at a profile and seen that debt consolidation is just not going to work?
SPEAKER_00Uh, when there isn't sufficient equity to do it, top out there. Equity. Or if like I've had some of these green loans that are getting around. I looked at a client's car loan the other day and it was like 2%. Like it was a genuine 2% interest rate. And I was like, oh, there's no point. Because and it was like Joss's um scenario. Like I thought, oh well, by closing that car loan, it's going to increase your borrowing capacity for the and get the property that you want. And then we looked at the interest rate, he told me it was a green loan, and I reviewed it and double checked it. I was like, yeah, actually, that's that's a cracking rate on that car loan. So by right, like ideally, let's not close that car loan, but just so you know, we can close you can use your sale proceeds to close it and increase your purchasing power if you choose to, but once again, it's not really in his best interest to close that loan because it's it's on a great interest rate.
SPEAKER_01Yeah. The other issue that I've seen as well is uh credit reports. So, you know, if you do have quite a number of facilities, no doubt you've got some inquiries on there. Um, I do you know, assessors will ask you the question about those inquiries because obviously they can see the facilities in your fact find that you filled out. So that's another thing that will always just creep up in there if we can't do that debt consolidation.
SPEAKER_02And that's just touching on Todd's um education piece as well. When you do sit down with clients, often maybe first home buyers, like these facilities and lenders make it so easy to apply for these kind of products, um, not knowing that they are having a hit on their credit report. And when you do speak to kind of credit specialists, um, it's oftentimes that uh a buy now pay later facility can impact your your credit score by about 60 or 70 points. Um so when they previous or well, when they initially came out those buy now pay later facilities, they didn't so much impact your credit score. Well, now they're massive implications on your your conduct. Yep.
SPEAKER_04I think it's really interesting as well when someone has heaps of credit cards, personal loans, any kind of debt, if you go through their bank statements with them and you see their spending habits, it's not just the debt that's out of control, it's the spending that's out of control as well. So going back to your $200,000 earner who's got no savings, if you go through the subscriptions with them and you go through all the eating out and the beers at the pub and just everything. How can you spend three grand a month on groceries with the two of you while you're trying to save your home? I think people don't realize because it's so easy to tap a card, they just don't know how much they're spending. Too easy. Yeah, without they designed it like that. But the the best thing with our bank statements link is that it sections it all out. So you can say to someone, all right, you're spending three grand a month, let's say, on eating out, and they go, No, I'm not. And you go, Okay, well, let's have a look at your bank statements together. Maybe it is time that you go through line by line and set up a budget and get out of this hole that you are in.
SPEAKER_02I mean, it's definitely something that we come across sometimes, like people inquiring to purchase their first house, and and when you do initially sit down with them, it says, Look, we've probably been a bit out of control with our spending now, which is understandable. And fortunately, lenders have probably loosened on spending requirements as of the past few years, where they have their own metrics based on household size and household income. Yep. But they're also going to apply common sense. If you've got uh a client that's on 200 grand a year, he's got credit cards to maintain his lifestyle and he has very limited savings, they're they're good, they're going to have questions on how you're gonna, you know, meet this repayment with proper conduct. Oh, 100%.
SPEAKER_01You know, the like you said, you know, when I first started broking, bank statements were mandatory. They're not as mandatory now. Yeah. But you know, our compliance is still, we need to check those. We need to check if we're giving the the right loan to this person based on spending habits. So bank might not necessarily need them, but we definitely do. Um, all right, let's go through some of the craziest debt consolidation that you've seen.
SPEAKER_00Yeah, I actually just thought of one while while we're talking then. Um I actually had one where the bank, so like you said earlier, like in the good times, interest rates were like 2%, 2.5%, they'll fix for two or three years. And they had gone back to their bank. I did the home loan for them, but in the meantime, after the home loan had settled, they'd been going back to their bank for the last 12, 18 months, getting credit cards, personal loans, car loan. Um, and it was all with the one bank.
SPEAKER_01Really?
SPEAKER_00Anyway, they went to the bank to tidy it up when interest rates started going up. The bank said, no, we can't help. So they put them all on repayment pauses and this and that. Anyway, they called me when it was getting real bad and they were considering selling the house. Um, but they had the equity, and I was like, nah, this isn't right. You've got the equity there. Let's go back, get the bank to consolidate it. They put you into this position, they lent you these loans. You can afford it if we consolidate it, you can keep your family home. They had kids and everything. Anyway, the bank declined it, got got a few uh heavy hitters here in the office involved, Col and Jess. Um, and we eventually got it overturned. It took a lot of time. Um, it was probably three months in a three-month process. Um, but yeah, at the end of the day, like, yes, the client has to have some responsibility on their own spending and their own habits. But also, if you've got banks just approving credit cards and and for you now, um the best thing that worked in our favor for this one was it was it was all at the one bank. So the bank had the home loan, the bank had the personal loan, the credit cards, like everything was there at the one bank. So like the bank had approved it all, interest rates went up, clients were in a tough situation, but they had the income and they had well, they had the income if it was consolidated and they had the equity, thankfully.
SPEAKER_01So credit is so easy to get these days.
SPEAKER_00Don't do wallet wizard. It'll wreck it.
SPEAKER_01Money in like an hour.
SPEAKER_04Oh, I have less than that. I applied for a credit card maybe six months ago, and within two minutes it was in my wallet, ready to go. Nothing, they just believed my word for it. They could probably see my pay going in.
SPEAKER_00Interesting.
SPEAKER_04It was the most insane experience I've ever gone through.
SPEAKER_00Just self-declare everything.
SPEAKER_04Literally just self-declaring. Um, but I was just thinking as well, my my craziest one probably recently. I I got a call from someone and he had an $800,000 loan for a yacht that he had bought recently, and he was expecting to get a huge inheritance. So he thought, oh, I'll get it on a loan. And uh within the the 12 months that I have the loan, I'm gonna pay it out. The uh the inheritance got contested and he was getting charged 20% a year. Got to the end of the 12 months, and he had to extend it out for another year with the private lender. They they let him do it, and then it got to the end of that 12 months, and I got the phone call a week out saying I can't extend it again. I need to do something. That one was probably the worst I have ever seen, going back to the $100,000 consolidation. That's crazy. I changed my mind. It was $800,000. Goodness.
SPEAKER_00It's one expensive boat by the end of that.
SPEAKER_04Yeah.
SPEAKER_01Um what's the biggest number of credit cards you've seen?
SPEAKER_02I've seen quite a large amount of credit card debt. Probably in my head it's $130, but it might be $170,000. Holy molys. And something funny that you will see as well is it can be passed down in generations with family too. Like typically you will see that spending behaviours do get passed down. Definitely. Um, the families that tend to love the toys and financing the toys and have the shed filled with things, um, it does it does go down to the kids as well.
SPEAKER_01Yeah, I think the max I've seen is about 90 grand credit card limits.
SPEAKER_00Yeah, I think mine's around that. Yeah, just wins that one.
SPEAKER_02Yours, yours personally, by the way.
SPEAKER_01West car loan you've seen? I had one last night that was 100 grand. I didn't think I can beat them.
SPEAKER_02It's just you you're getting on to it now. Hey, like uh there's I have multiple first home buyers at the moment with 80 to 100,000.
SPEAKER_00I've seen like Dodge Ram loans for like 100 plus, yeah.
SPEAKER_01So uh debt consolidation is always there. Um, you know, it's not necessarily how do I make my repayments as small as possible. It's how do I structure my debt so that I can actually get ahead. So we talk about advice meetings all the time, but you know, that's why we ask for documents and credit card statements and bank statements up front so that we can have that good conversation to actually come up with a plan. Um, you know, lower interest rate, yes, it can help, but it just needs to be structured the right way.
SPEAKER_02And that's that's probably questions to to ask your broker as well, obviously. Like if you are consolidating car loans, credit cards, personal loans, things like that, and they're just looking to wrap that into the primary mortgage there, how are you going to be financially responsible to pay that off in a timely manner? So, more often than not, I I think it's pretty common in this room that if you are consolidating debt, you will do as a separate loan split.
SPEAKER_00Yep.
SPEAKER_02And you you hold them responsible to it as well. So although the minimum repayments might be $300 a month, at the moment you're managing $900 a month. So if you want to continue to pay that loan off in a timely manner while also reducing the interest payable, continue to make those repayments or even up it. Um it's very hard to see progress when you're taking little chunks out of a $700,000 home loan. But by having that $50,000 separate loan split, there's a lot more, you know, fulfillment in actually paying chunks of that off and seeing it decrease.
SPEAKER_01Yeah, I mean, you know, you can always say to them, look, attach an offset account to that 50 grand, um, you know, and over the two year or three year period, you might not end up paying any interest on that home loan. So yeah, good conversation.
SPEAKER_00That's important, but hey, don't just absorb that additional cash flow into your spending habits. Like be disciplined and try to make that additional repayment. Yep.
SPEAKER_02She had a really interesting one recently where we consolidate a car loan into the mortgage. Um, and just working with their financial planner, they um implemented some advice to actually recycle that debt into um investment debt, which I thought was really interesting then because it it kind of adds another sense of paying that debt off sooner because by recycling it, you're up in your investment portfolio. Um, just gives it some extra justification as well.
SPEAKER_01Final question around the table. What's the one thing you wish every client knew before they asked you to consolidate their debt? That's uh cricket's there, mate. That's a good question. I personally like using generation. Is it their credit report? Is it is it not understanding?
SPEAKER_00Well, I was just gonna say not understanding. Like, I think it's it's it's generational, you know. Like I still remember when my mum sat me down when I was 15 and started talking to me about credit cards, but they don't talk to you about that at high school. No. But she sat me down and said, Look, when you do eventually get a credit card, you're gonna see this balance and you're also gonna see this minimum repayment. Ignore the minimum repayment, pay the balance. Pay the balance. I still remember that, like at the family home when she sat down and told me that. And but you know, I've got friends, I know people that are probably 30, 40 years old and still don't really understand it, you know. Like it's yeah, they don't teach you that at school. So I think just that that minimum education, like I wish I wish it was more readily available, or people actually sort it, maybe. Maybe it's up to them. Maybe they need to seek it.
SPEAKER_01Well, that's that's why we're here, that's why we do what we do is to make people aware of not only spending habits to actually put them in a better position. So very good. Thanks, team. Um until the ATO tax debt next one comes through. Thanks for joining. Thank you. We'll keep you uh updated on the RBA decision next week as well.
SPEAKER_00Next week.
SPEAKER_01Thank you guys. Thank you for listening to this episode of our podcast. We hope you enjoyed it as much as we enjoyed creating it for you. If you have any feedback, questions, or suggestions for future topics, please don't hesitate to reach out to us. All of these episodes are available to download for free wherever you get your podcasts. Until next time, take care.