Whilst the rules surrounding getting a mortgage for a home continue to tighten, the ability to obtain short-term debt is still relatively easy.

Short-term debt takes different forms – credit cards are always popular, with banks keen to get these out to clients. Other forms include car loans, personal loans and loans against household items. Every type of short-term loan differs slightly but they are all the same in two very important areas – they come with high interest rates and they are repayable over a short period of time.

Small loans allow us to buy what we want straight away and fool us into thinking they are just that – small. The problem is that just a few small loans turn into a big loan and, potentially, a big problem. This generally hits home for borrowers at one of two different times – 1. When the number of small loans adds up to start really hurting household cashflow and 2. When it comes time to get a mortgage.

Banks will apply the limit of the credit card debt that you have, not what you owe, when you are applying for a mortgage, even if you pay the debt off every month. Short-term debt also eats away at how much you can afford for a mortgage to a much larger degree than most people realise. An example below:

If you have $20,000 owing on a credit card it equates to you having a mortgage of around $120,000. Interest rates and repayment timeframe conspire to make short-term debt costly.

Student Loans also hurt borrowing ablity. Even though they may be interest free, the repayment expectations (via direct deductions from income) make them a costly handbrake to borrowing ability.

So, what can you do?

Ideally, wait and pay cash for things but, we all know, that’s hard to do.

If you have a home or other property, it makes complete sense to pay off short-term debt by getting a mortgage or adding to your existing one. This method also gives the chance to review the structure of your borrowing, and maybe even the bank it is with, to make sure you have a mortgage that works for your current situation. By adding short-term debt to the mortgage, it increases your ablity to borrow and takes the pressure off your monthly payments.

We’re here to help with your options and could save you a lot of stress and interest along the way.